The news no one wanted: disappointing U.S. CPI and PPI data

• The U.S. Consumer Price Index increase was higher than expected, indicating persistent inflation driven by shelter and gasoline prices.
• February's Producer Price Index increase was also higher than forecast, challenging quick disinflation hopes and impacting U.S. Federal Reserve rate cut expectations.
• Japan's policy shift imminent; its stock market outperformed year to date.

The latest data on consumer prices indicated a higher than anticipated increase, with the core Consumer Price Index (CPI) rising by 0.4% month over month, surpassing the expected 0.3% and aligning with the highest analyst predictions. Year over year, the core CPI showed a slight deceleration to 3.8% from the previous 3.9%, yet it did not fall to the anticipated 3.7%. The overall CPI figures also showed a month-over-month increase of 0.4%, in line with expectations but higher than the previous 0.3%, and a year-over-year rise to 3.2%, slightly above the forecast 3.1%.

Notably, the core CPI three-month and six-month annualized rates escalated to 4.1% and 3.8% respectively, indicating a persistent upward trend. This continuation of inflationary pressures in January and February challenged the notion that the earlier surge was merely a seasonal anomaly. The Bureau of Labor Statistics highlighted that the increases in shelter and gasoline prices were significant contributors to the monthly rise, accounting for over 60% of the increase, which suggested that inflation is somewhat concentrated in specific sectors and that the overall picture is fine. And yet…

Following this consumer price data, the February Producer Price Index (PPI) also reported a higher-than-expected rise, with the headline PPI for final demand climbing by 0.6% month over month, twice the anticipated 0.3% increase. This marked the most significant rise since June 2022, propelling the year-over-year PPI to +1.6%, the highest since September. This scenario indicated challenging times ahead for those expecting a quick disinflation, leading to adjustments in market expectations regarding U.S. Federal Reserve (the Fed) rate cuts. In fact, expectations out of the Fed moved on the news, as did rates. In mid-January, markets expected six cuts in the U.S.: we’re now down to three.

Despite these inflationary pressures, the stock market has maintained a resilient stance, adopting a dual perspective where both positive and negative economic indicators are interpreted as favourable. Remarkably, the U.S. market has not experienced a 2% drop in a single day for 265 days, the longest stretch since 2017. The market’s view is that the Fed has shifted its strategy towards a more lenient approach to inflation, and unless there is a major shock, we still see more accommodating financial conditions ahead. If that is indeed what happens, let’s hope the Bank of Canada will take a similar stance.

On the global stage, significant updates came from Japan. The Bank of Japan made a series of announcements signalling a likely move away from negative interest rate policies at its March meeting, along with potential adjustments to its balance sheet strategy. Japan's stock market performance in 2024 has been very strong, up by more than 15% in local currency, but an uptick in the yen's value could pose challenges for the continuation of this hot trend. This is something we’ll follow and update you on.

Listen to this week’s podcast for further insights.