Thursday, June 26, 2014

Seasonality in Monthly Inflation Rate in Canada

Seasonal variations in monthly inflation rate in Canada reflect the sales pattern in the retail industry.

Summer has arrived with our letter boxes being filled with flyers announcing, here and there, great deals on furniture, household appliances, sports equipment, travels … Many items seem cheaper at this moment of the year. But is it the best time for shopping?

The figure below plots monthly series as well as monthly averages of inflation rate in Canada. Inflation rate is the percent change in the level of the price of the goods and services we consume. In the series plotted below food, energy, and the effects of indirect taxes are excluded.  

Inflation Rate, Unadjusted seasonally, Canada, 1984:M2-2014:M5, Data Source: Statistics Canada
Figure: Inflation Rate, Unadjusted seasonally, Canada, 1984:M2-2014:M5, Data Source: Statistics Canada

Table: Summary Statistics of Inflation Rate, Unadjusted seasonally,
Canada 1984:M2-2014:M5
Summary Statistics of Inflation Rate, Unadjusted seasonally, Canada 1984:M2-2014:M5

The monthly long-run inflation rate, in Canada, is .18 %. Seasonal variations add, each month, to this rate. Thus, December is the only moment of the year prices mostly fall. They fall, on average, by .13 %. This is due to seasonal variations (December sales), which are in the order of .31 percentage points. In January, consumers still benefit from the low prices of December because the end-of-year sales that go on offset the expected increase in prices. The sales in January actually aim at reducing inventories. New stocks arrive in February and are sold at their regular prices, which brings inflation to .29 percentage points above its long-run level. The average increase in prices in February, which is in the end .47%, is higher than at any other moment of the year.

In June, inflation is almost nil because the expected increase in prices is again offset by the seasonal variations that have to do with the sales taking place at that moment of the year but the deals offered cannot be compared to those of December that cause a general fall in prices.

The increase in prices in April and December are, on average, lower than the long-run inflation rate due to negative seasonal variations that have to do with Easter and autumn sales.

Prices are indeed low In January but, as the monthly standard deviations in the above table indicate, they fluctuate to a very great extent one year to another. Both the lowest and the highest inflation Canada experienced occurred in January. In January 2009, prices fell by .71 %, which contrast with the historical rise of .98 % in prices that occurred in January 1991.  About 89 % of this variability observed in January is due to cyclical and random components in prices.