Is it Hot in Here or is it Just Inflation?

The May CPI data out of the US came in much hotter than expected. Most analysts had expected year over year inflation to hit 8.3% but instead flew right past that to a new 40 year high of 8.6% (highest since 1981). The inflation numbers are being led by food and energy prices, which even when excluded; still puts inflation at an eye watering 6% year over year. Canadian energy and mining stocks declined as commodities fell after China imposed new lockdowns in parts of Shanghai, lowering the demand outlook. U.S. stocks also fell for a second day as concerns grew after Europe’s central bank became the latest to signal restrictive policies to combat inflation. The ECB made no change to the deposit rate, which was widely anticipated, but is preparing to hike by a quarter-point next month, and again by either that amount or more if inflation persists. In Canada the labour force survey was released today and showed a concerning increase in private sector unemployment (up 2%) and a shift to public sector jobs – an increase of 11%.

The overriding theme today though is that inflation has still not been curbed even though there have been some aggressive interest rate hikes by the US Fed. The latest numbers increase the pressure on the US central bank and policy makers to bring the rampant inflation under control. In the past the aggressive hikes in interest rates have been a useful tool to combat inflation, but the war in Russia/Ukraine has been disrupting those plans as it’s driven up the price of oil and commodities like wheat and potash. Food prices in the US have increased 10% in the last month, while energy has increased by 34%. Like Canada, the US has been dealing with an unexpected strong rebound in the economy last year, coupled with the influx of government spending which included direct payments to households, overwhelming existing supplies prompting companies to increase prices. Add the war with Ukraine into the mix and covid related shutdowns in China’s manufacturing sector and we can now see the emerging results.

In hearings in Washington this week, US Treasury Secretary Janet Yellen said bringing down prices was the "number one priority." The US President, Joe Biden, deflected blame onto Putin. "I'm doing everything in my power to blunt Putin's price hike, and bring down the cost of oil and food," the president pledged at a speech at the Port of Los Angeles in California. The Fed has signaled that it will raise its key short-term rate by a half-point (0.50%) – double the size of the usual hike – next week and again in July. Some investors had hoped the Fed would then slow its rate increases to a quarter-point hike (0.25%) when it meets in September or perhaps even pause its credit tightening. However, with inflation raging hot, investors now foresee yet another half-point hike in September, which would be the fourth since April.

North of the border, Statistics Canada, not to be outdone by our neighbours to the south, released our riveting Labour Force Survey numbers. Jokes aside, the information is just as important. Canada’s economy added 39,800 jobs last month as a surge in hiring help to push the jobless rate down to 5.1% the lowest it’s been since proper record keeping started in 1976. More than 135,000 people found full time jobs which contrasts with a decline of 96,000 part time positions. In fact, the ratio of unemployed people to job vacancies has reached an all-time low of 1.2. Workers have unprecedented leverage now, and many of them are seeking out higher paying positions — and getting them. Stats Canada says the average hourly wage has risen by $1.18 in the past year, to $31.12 an hour. That's an increase of 3.9%. While an impressive by historic standards, it's still well short of the country's official inflation rate of 6.8%.

Source: Statistics Canada

One thing to note when looking at Statistics Canada’s report, is that the there’s been a shift in job sector employment from the self-employed (think entrepreneurs) sector to the public sector (think government jobs). From February 2020 to the end of May 2022, we have seen a decline of 6.6% in self employed jobs, and an uptick of 10.7% in public sector jobs, while private sector jobs (non-government employer) has seen an almost negligible change outside of a slight uptick of 2.2%. 

Why is this something of note?

Public sector jobs are jobs created by the government, which offer employees guaranteed pensions (funded by taxpayers), high job security, and wages that are indexed to inflation. These same wages which are paid by the taxes that self employed, and private sector jobs create, are the same jobs that take labour away from smaller businesses that don’t have the ability to compete against the government. This forces smaller business to increase their costs in order to compete, thereby feeding into the inflationary environment that we are already experiencing. It’s a catch 22 scenario for Canada’s life blood – the small business as potential jobs seekers won’t take a chance on them, if they may not be around in a year.

We continue to watch and monitor the inflation numbers, for the both the US Fed, and the bank of Canada’s upcoming rate hikes to see if there are any discernible changes in the year over year inflation numbers. There is currently a ton of discussion on how to tackle inflation, but few things beyond rate hikes to show as demonstrable actions.  

As always, if you have any questions about interest rates, you can call us at 604-643-0101 or email cashgroup@cgf.com