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.

National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, Associate Portfolio Manager and Wealth Advisor at NBF.  I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF. The opinions expressed are based on my analysis and interpretation of historical data. Values and returns will fluctuate, and past performance is not necessarily a guarantee of future performance. The particulars contained herein were obtained from sources I believe to be reliable but are not guaranteed by me and may be incomplete. The opinions expressed are based upon my analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your wealth advisor to verify whether the securities or sectors suit your investor's profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors.

Contact us

Get contact information for our team members and find out where our offices are.