Market Wire - North American Data Releases Illustrate Potential Cooling in Price Pressures

Karl Schamotta - Chief Market Strategist

Canadian prices inched 0.2 percent higher on a month-over-month basis in November after climbing 0.7 percent in the prior month - keeping expectations for Bank of Canada rate hikes largely intact, while suggesting that inflation pressures could be cooling.  Data released by Statistics Canada this morning showed the Consumer Price Index rising 4.7 percent year-over-year, following a similar increase in October. 

Increases were broad-based: Gains were recorded in most major categories, with food up 0.9 percent month-over-month while shelter costs rose 0.3 percent.

Housing costs lost momentum: The homeowners' replacement cost index – a proxy for new home prices – dropped 1.1 percent month-over-month, up 13.5 percent over last year. The other owned accommodation expenses index, which includes commission fees on the sale of real estate, dropped to a slightly-weaker 13.3 percent year-over-year gain. Mortgage interest costs were down -8.3 percent over last year. 

Energy prices began to roll over: Gasoline prices fell 0.1 percent month-over-month, following a sharp decline in global oil benchmarks. 

With volatile components extracted, price growth was more restrained: Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 2.73 percent. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying domestic economy. 

Monetary tightening remains likely: With price increases topping the Bank of Canada’s target for eight months running, markets expect policymakers to hike at least five times over the next twelve months. 

American consumers slowed spending last month: According to figures published by the Census Bureau this morning, sales at retail stores, online sellers and restaurants rose by a seasonally adjusted 0.3 percent in November compared with a 1.8 percent gain in the previous month. With gas and motor vehicle sales excluded, receipts moved a surprisingly-modest 0.2 percent higher. 

Weakness was evident across most tangible goods categories: Sales of electronics and appliances plunged -4.6 percent, while the auto and auto parts segment shrank -0.1 percent. Sporting goods climbed 1.3 percent, while building materials eked out a 0.7 percent gain. Apparel spending rose 0.5 percent, while receipts at food services and drinking places inched 1 percent higher. 

Both online and bricks-and-mortar stores suffered: General merchandise operations posted an -5.4 percent decrease while e-commerce sales flatlined.

Many explanations are possible: Higher prices may have crimped household budgets. Expectations of future increases and shortages may have pushed consumers to make holiday purchases earlier than normal. Overall spending levels could be executing a long-expected pivot toward services. Or household savings may have been depleted. 

A hawkish Fed won’t be derailed: Traders are overwhelmingly convinced the Federal Reserve will begin reducing monthly asset purchases more sharply this afternoon, using its “dot plot” summary of economic projections to signal an earlier and more aggressive liftoff in rates next year. Since his renomination, Chair Jerome Powell has clearly telegraphed a commitment to fighting inflation, and data releases - non-farm payrolls, consumer prices, and yesterday’s producer price index - have depicted an economy rapidly approaching fulfillment of the central bank’s twin employment and inflation mandates.