U.S. headline inflation will be anxiously awaited next week as Fed officials debate how much to raise interest rates. We expect Tuesday’s report to show the year-over-year measure falling to 5.9% in February compared to 6.4% January (which was the lowest reading since October 2021). Much of that easing has come from lower energy prices and signs that food price growth is past its peak. Growth in those categories should continue to slow on lower commodity prices and easing global supply chain disruptions. One closely-watched measure from the New York Fed reports that global supply chain pressures have now essentially returned to normal.
Inflation pressures across other goods and services—the kind of inflation more directly influenced by U.S. Federal Reserve interest rate decisions—has also been edging lower, though its proven stickier than expected in recent months. We expect the February numbers to look better with ‘core’ inflation (which excludes food and energy products) dipping to 5.4% from 5.6% in January. A rising share of that increase is still coming from the lagged impact of earlier increases in home rents flowing through to leases—a pressure that won’t last given the slowdown in current market rent prices. Core services ex-rents, the Fed’s preferred measure of domestically-driven inflation, rebounded slightly in January and will be closely scrutinized for any signs of easing.
Robust U.S. labour market data indicates strong economic momentum at the start of 2023, and stickier inflation suggests it may take longer to get back to the 2% target. This is bolstering the case for further interest rate hikes from the Fed.
Week ahead data watch
StatCan’s advance estimate indicates January manufacturing sales rose 3.9%, boosted by petroleum and coal products, motor vehicles, primary metals and railroad stock industries.
We expect Canadian housing starts to rebound to 245,000 units in February following a decline to 215,000 units in January.
The Canadian Q4 household debt service ratio (the share of household disposable income eaten up by debt payments) likely ticked up to 14.3% in Q4—below pre-pandemic levels but up from a low of 13.3% in Q1 2021. We expect the ratio to rise to record levels this year as aggressive BoC interest rate hikes continue to flow through to household debt payments.
We expect U.S. retail sales edged 0.1% lower in February, with sales in the motor vehicle sector shrinking by 3.3% during that month. U.S. industrial production likely tick down 0.1%, given hours worked in both manufacturing (-0.5%) and mining (-1.1%) sectors fell in February.downturn.
