U.S. CPI continues to rise

U.S. CPI continues to rise

U.S. inflation soared to a four-decade high for the month of June. The consumer price index (CPI) rose 9.1% from a year earlier and signaling the largest increase since 1981. The month-over-month increase of 1.3% was also the biggest jump since 2005. This jump in the CPI numbers was higher than the 1.1% that was projected by economists, who also projected a 8.8% year-over-year increase in CPI, compared to the actual 9.1%.

The core CPI, which strips energy and food from the mix and gives us a better understanding of the underlying inflation trend, had a more steady increase of 0.7% from the previous month and a 5.9% increase from the previous year. This is the third month core inflation has cooled from its high of 6.5% in March. A significant driver of the current inflationary pressure is by the increase in energy and food costs. Energy prices alone are up 42% from 2021 and up 7.5% since May, contributing to almost half the increase in the overall inflation. However, since June commodity prices have fallen significantly; oil declined last week to its lowest since the start of the Russia-Ukraine war, trading at close to $91 before closing the week at $98.

As we continue to see a decrease in commodity prices, a cooling in the housing market caused by the increasing interest rates, easing of supply shortages, and lower demand for goods as there is as increasing demand for services, we believe inflation will start cooling down in the coming month, albeit slowly. The moderation is stil dependent on a lot of variables as the ongoing geopolitical tensions and how that could continue to impact commodity prices.  

Bank of Canada announces the largest rate hike since 1998

In what was a surprise to a majority of Canadians, BoC increased its overnight interest rate by 100 basis points last week. This was a surprise to a lot of people as they were expecting a 75 basis point hike. The central bank cited the ongoing war in Ukraine and the ongoing supply chain issues as the main factors as to why they had to be aggressive with the rate hike.

The inflation numbers for Canada are set to be released this week, and we can expect a similar trend as the one we saw in the U.S. Bank of Canada stated that we could potentially see inflation hover around 8% for the next few months. The tightening of monetary policies to combat inflation is something we are globally seeing right now, and BoC forecasts economic growth to slow down to about 3.5% for this year and 2% in 2023.

The Canadian economy has also been seeing excess demand built up along with record low unemployment rate, widespread labour shortages, and increasing wage pressures. As demand continues to build up, businesses are passing on the higher costs incurred by them to the consumers by increasing prices. The Bank of Canada expects interest rates to further rise, but the pace of increase will be based on the ongoing assessment of the Canadian economy and inflation. The next scheduled date for announcing the changes in overnight rate is September 7, 2022.

Market Stats

• The major U.S. indexes recorded smaller declines, marking the 12th week of it being in the red out of the past 15 weeks.
• Technology stocks were among the best performers within the S&P 500, helped by solid gains in Apple. Energy stocks underperformed as oil prices declined to pre Ukraine-Russia conflict levels.
• The yield of the 2-year U.S. treasury bond remained above the 10-year bond continuing the inversion of the yield curve.

As the market continues to navigate through rough waters, there are hopes of inflation cooling as the decrease in oil and gas prices, along with other segments should lead to a deceleration of price pressures in the coming months. Going into the new week, we will be monitoring the release of CPI data for Canada and we’ll also be monitoring the earnings reports by the major corporations as the Q2 earnings season kicked off last week.