The week in the markets -
February 24, 2023

Making sense of conflicting inflation news

The Canadian Consumer Price Index (CPI), the measure of the average change in prices of goods and services purchased by households over time, was released this week. The data showed inflation in Canada decelerated slightly in January, with a year-over-year increase of 5.9%. This was lower than the 6.1% estimate and the 6.2% inflation rate from December 2022 (a similar story to that which played out in the U.S. last week).

Data shows the main driver of inflation in Canada continues to be the shelter category, which accounted for nearly 2% of the overall inflation rate. Another category that consumers are concerned about is food, which saw a 10.4% increase year-over-year. Extra costs in food were offset somewhat by lower gasoline prices, which decreased from 6.3% to 2.9% year-over-year. CPI excluding food and energy (another measure of core inflation) was 4.9% year-over-year, a decrease from the previous month.

At the same time, some news from the U.S. was not so pretty. The PCE (personal consumption expenditures) deflator, another inflation measure that is less known to the public but favoured by the central bank, came in higher than expected. The PCE adjusts data in consideration of consumer habits, for example by switching higher-priced for lower-priced items, in times of economic stress. Markets expected a 5% increase, but the actual number came in at 5.4%. This did nothing to alleviate the fears of further rate hikes.

On a more positive note, S&P Global released its Manufacturing Purchasing Managers’ Index (PMI) for February (this index provides insight into the health of the economy). The composite gauge rose to 47.8 from 46.9 in January. This trend is positive, as we see manufacturing reinforce the view that global demand for goods is stabilizing.

How will the economy manage a soft landing?

Consumer prices are decelerating slowly, but this doesn’t usually happen in a straight line. Jobs continue to be plentiful, despite some companies trimming headcounts from surplus hiring in 2021.

A soft landing will depend on inflation data trending downward at a faster pace, otherwise central banks globally will have to smother the hot economy, which would deter expansion and slow down consumer spending. A soft-landing scenario is possible, given that the labour market is still very strong.

Initial jobless claims in the U.S. declined to 192,000 in the week ending February 18, from 195,000 the week before (this was the sixth straight week below 200,000). Claims also remain below the pre-pandemic average of 218,000 in 2019. The Federal Reserve Bank of Kansas City said, “Retirements from the baby boom generation are likely to put additional downward pressure on labor force participation rates over the next decade.”