This week’s chart highlights one of the key financial questions for 2024 – has inflation bottomed or will it continue to ease toward 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 blue line 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.
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 U.S. jobs data released on February 2nd also suggests the potential for inflation to reaccelerate. On Friday, Feb. 2, 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 was January’s number stronger than expected, December’s Nonfarm Payroll number was revised substantially higher (addition of 333,000 jobs from 216,000 originally reported).
Bottom line – it will be difficult for inflation to reach the 2% central bank target 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 several 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.
Eric Van Enk is a wealth adviser & associate portfolio manager with National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary, as well as a CFA charter holder with 20 years of financial markets experience in New York, Toronto and Calgary. He can be reached at eric.vanenk@nbc.ca
