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Has inflation bottomed out?
February 24, 2024 Insight from Eric Van Enk, Wealth Advisor & Associate Portfolio Manager
Has inflation bottomed out?
This week’s chart highlights one of the key financial questions for 2024 - has inflation bottomed or will it continue to move lower, towards the 2% target of the Bank of Canada and the U.S. Federal Reserve? In the supplied chart, the red line represents U.S. inflation (headline CPI) while the blueline represents the NFIB Survey of U.S. small businesses, specifically, the net percentage of small businesses which intend to increase prices for the goods or services they sell over the next year.
Source: National Bank Financial
Notice the correlation between the NFIB Survey and U.S. inflation over time (chart dates to 1985). This relationship makes sense when you consider business owners have the best knowledge of their respective businesses and, if they intend to increase prices, higher prices will result in inflation for the consumers of the goods or services purchased. Notice the recent uptick in the net percentage of small businesses which intend to increase prices (blue line), highlighting the risk of inflation (CPI) reaccelerating. The most recent US jobs data released on February 2nd also suggests the potential for inflation to reaccelerate. On Friday, February 2nd, the most influential U.S. jobs data (Nonfarm Payrolls) was reported substantially higher than economists’ expectations – the U.S. added 353,000 jobs in January compared to expectations of adding 180,000 jobs. Not only did we see strength in January’s number, we also saw a large upward revision to December’s Nonfarm Payroll number (revised to a gain of 333,000 jobs from 216,000 originally reported). Bottom line - it will be difficult for inflation to reach central bank targets if the jobs market remains tight and businesses continue to increase prices.
Why should you care? If inflation reaccelerates this year, the Bank of Canada and the U.S. Federal Reserve won’t be able to reduce interest rates – the primary role of central banks is to maintain inflation near their target level of 2%. Financial markets are currently discounting substantial interest rate cuts in 2024. If those cuts fail to materialize, I would expect substantial market volatility as higher interest rates impact the economy and asset prices.
