The inflation peak of 8.1 per cent in June 2022 now seems a distant memory. Inflation, as measured by the overall Consumer Price Index (CPI), fell to 2.5 per cent in July 2024, down from 2.7 per cent in June.
Historical data from the Bank of Canada suggests that the June 2022 peak was an anomaly. Since January 2024, inflation has remained below the upper limit of the Bank of Canada's 1 to 3 per cent target range, as it did for several years before surging in April 2021.
“Several shelter components were key contributors to overall CPI growth.” – Conference Board of Canada
In its August 20 economic update entitled Pace of Price Growth Moderates Further in July, the Conference Board of Canada (CBoC) discussed the inflationary forces at play. Gasoline prices increased by 2.4 per cent on a monthly basis and were 1.9 per cent higher than a year ago. Year-over-year, food prices rose by 2.1 per cent in stores and 3.8 per cent in restaurants, stated the CBoC.
The Conference Board also noted the core inflation index, which excludes food and energy prices. According to the Board, this index rose by 2.7 per cent in July 2024 compared to the previous year. “Several shelter components were key contributors to overall CPI growth.,” the organization highlighted.
Caution as two per cent target remains elusive
Empire Life Investments remains cautious about inflation. In its macroeconomic overview entitled 2024 Semi-Annual Market Outlook, Empire Life Investment’s team emphasized the difference between headline inflation and core inflation. The outlook noted that core inflation remains “remains stubbornly above the 2% target set by most developed nations.”
The insurer added that signs suggest inflation is moderating at different paces between economies. “This may lead to greater divergence in interest rate policies, most notably between Canada and the U.S..”
In its Fixed Income outlook, Empire Life Investments states that the positive investor sentiment seen at the end of 2023 will largely persist. However, it considers a soft landing scenario uncertain. “There is also a real risk of a more volatile cycle as lower rates could re-introduce higher inflation,” explains the outlook.
Economic slowdown
Empire Life Investments noted that such a scenario could prompt central banks to resume tightening monetary policy, potentially leading to an economic slowdown. “Policy remains highly data dependent, especially in the U.S. where data remains mixed,” the outlook pointed out, referring to employment figures.
Empire Life Investments expects the year to end as it began, in terms of investment outlook. “Monetary policy, global growth, politics and innovation have dominated headlines in 2024, and we expect these broad themes to continue to have an impact on markets as we head into the second half of the year,” reads the macroeconomic outlook.
Volatility
In an August 16 bulletin, Sébastien Mc Mahon, Chief Strategist, Senior Economist and Vice-President, Asset Allocation & Portfolio Manager at iA Financial Group, reflected on the market panic on August 5.
The Japanese stock market dropped 20 per cent in three days. At one point, the VIX (volatility index) surged to 65, one of the highest levels in history, alongside the 2008 financial crisis and the COVID-19 pandemic, he recalled.
This was followed by a strong recovery in mid August. At of the close of markets on Thursday, August 15, the S&P 500 index had returned 3.77 per cent. The NASDAQ, concentrated in technology stocks, returned 5.12 per cent. Year-to-date, the S&P 500 has seen a 21.53 per cent return, and the NASDAQ 22.06 per cent. All figures are in Canadian dollars.
Inflation normalizes
Regarding interest rates, Mc Mahon believes the U.S. Federal Reserve has the green light to cut interest rates as early as September 18. U.S. inflation continues to normalize. It would take a significant surprise for the Fed to delay cutting rates again, Mc Mahon speculated.
He added that the U.S. labour market is also normalizing. In his view, the U.S. economy is nearing an ideal point, with inflation returning to target and an economy that is neither too strong nor too weak. This is a scenario that could support the markets in the coming weeks and months. But that doesn’t mean there won’t be volatility this fall, ahead of the elections, cautioned Sébastien Mc Mahon.
Last week, Jerome Powell, Federal Reserve Chair, was quoted by several media outlets as stating “the time has come” for an adjustment to monetary policy, signalling that a rate could be on its way soon. He did not, however, provide any specifics.
