Volume 28, Issue 8
February 20, 2024.


Feb 16

Feb 9


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Source: Globe & Mail


Mind the (Inflation) Gap: CPI vs. PCE

Sal Guatieri

BMO Senior Economist


Will the real U.S. inflation report please stand up. A chunky 0.4% rise in core CPI prices held the yearly rate at 3.9%. And, the eye-popping 0.8% spike in core services prices (ex-rents) suggests stickiness in labour-intensive industries still struggling with worker shortages. Meantime, the Cleveland Fed’s trimmed-mean and weighted-median CPI measures both rose 0.5% last month, suggesting the leap in core prices wasn’t related to a few anomalies that are poised to retrace next month. An unwelcome jump in core producer prices only piled onto the bad news. True, one month doesn’t make a trend; and, as Scott explains, some of January’s spike could be reversed in coming months. But the fact of the matter is that, even if core goods continue to deflate, the Fed’s price stability goal could prove elusive unless service costs cool down much further.

But wait, you say, the Fed doesn’t target the CPI but the more comprehensive PCE deflator, which has decelerated rapidly. In fact, core PCE prices rose an annualized 1.9% in the second half of 2023, or a tick below the target. On a yearly basis, the core PCE deflator moderated to 2.9% in December, a full percentage point below the core CPI rate. Even if prices rise 0.3%-to-0.4% in January, the yearly rate could edge down a tenth or two due to an easy comparison last year. The gap between the two core inflation measures could widen to 1.2 ppts—the largest in over 22 years and three times the long-run median (of 0.42 ppts going back to 1960).

The PCE deflator tends to run slower than the CPI largely because of substitution effects, as shoppers often swap faster-rising items for slower-moving ones. The gap tends to widen in high-inflation periods. This gap reflects a mix of different weights on spending categories, different items within categories, and diverse methods of measuring price changes. To help explain the source of the 1.0-ppt spread between the two core measures in December (more than twice the norm), it’s best to focus on the two categories—rent and health care—that have the biggest weight difference (by far) and often the biggest variation in price movements. Primary rent and owners’ equivalent rent account for a combined 43% of the core CPI (as of December 2022), and their 6% rise in the following year added a hefty 2.7 ppts to core CPI inflation in December 2023. By comparison, rent accounts for a smaller (though still large) 17% share of the core PCE deflator, and a mild 1% rise last year added just 0.2 ppts to core PCE inflation. The net 2.5-ppt contribution of rent to the core rate gap was partially offset by a negative 1.0-ppt contribution from health care. This reflected the larger weight of health care in the core PCE deflator (22.1% versus 10.1%), combined with a faster increase (about 6%) in medical costs compared with a much milder 0.5% rise in the CPI. Together, rent and health care accounted for a net 1.5 ppts of the gap in the two core rates; i.e., more than all of it. Without these two heavyweights, core PCE inflation likely would be above the core CPI rate in December. Then again, excluding shelter, core CPI inflation would also be much lower than it currently is; in fact, just 2.2% in December and January, according to the BLS.

Bottom Line: As rent growth moderates this year, Inflation should ease further. But sticky services costs, even beyond shelter, suggest the decline—regardless of the survey—will be gradual. This means the Fed might not attain “greater confidence that inflation is moving sustainably toward 2 percent” until the summer, thereby delaying rate cuts until the 2024 Olympics are underway.


Frank and Mark.


Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.



The TSX rose 1.2% last week, on the back of broad strength in energy, financials, consumer staples and industrials—some solid earnings hits helped. While not pushing record highs like it’s U.S. counterpart, the Canadian index has moved to the highest level since early 2022, and is climbing the ascending 50- and 200-day moving averages again.

YTD, the TSX is up 1.42%, and the benchmark 10-year yield ended the week to yield 3.58%.


U.S. & Global

Equity markets were little changed last week, with tough inflation news keeping the market in check. The S&P 500 dipped 0.4% as gains in banks and energy were offset by weakness in technology and communication services. The index continues to hold above that closely-watched 5,000 level.

Last week’s raft of economic data all came back to, what else, inflation. Ugh. The U.S. CPI report was not good, to put it politely. Headline inflation came in two ticks stronger than expected at 3.1% y/y in January, while core inflation was also two ticks above the bar at 3.9% y/y. Drilling down into the core, there was pretty widespread strength, leaving the 3-month annualized rate at 4.0%; and supercore at a smouldering 6.7% annualized. Now, that said, core PCE is still tracking reasonably well for January, and we’ve seen these two inflation concepts break away from each other in a serious way (the Fed, technically, preferring the milder PCE version). Meantime, producer prices were stronger-than-expected in the month as well and, while not usually a big market mover, it didn’t look good against the CPI backdrop. PPI ex-food & energy rose 0.5% in January and accelerated back to 2% y/y. Elsewhere, retail sales were down a disappointing 0.8% in January (or -0.4% in the core control group), but consumer confidence and inflation expectations from the University of Michigan offered little surprise.

All in, the inflation reports were not a good look for those expecting near-term rate cuts, and we continue to believe (and now see) that the market got too ahead of itself with such expectations. The market still prices in just about a full rate cut for the June Fed meeting, and we have maintained our July call. But suffice it to say the timing and magnitude of rate cuts has been pushed out/slimmed down.

YTD, the DJIA is up 2.49%, the NASDAQ is up 5.09%, and the S&P 500 is up 4.94%.  The 10-year Treasury yield ended the week to yield 4.32%.


Source: BMO Capital Markets


The Good: Existing Home Sales +3.7% (Jan.); Construction Investment +0.3% (Dec.); New Motor Vehicle Sales +16.3% y/y (Dec.); Core Wholesale Trade Volumes +0.2% (Dec.) Global Investors bought a net $10.4 bln in Canadian securities (Dec.)—mostly in debt instruments.


The Bad: MLS Home Prices -1.2% (Jan.); Housing Starts -10.2% to 223,589 a.r. (Jan.); Manufacturing Sales Volumes -0.1% (Dec.).


The Good: Initial Claims -8k to 212k (Feb. 10 week); NAHB Housing Market Index +4 pts to 48 (Feb.); Philly Fed Index +3.3 pts to 45.2; Empire State Manufacturing +8.7 pts to 48.4 (Feb.)—both ISM adjusted; U of M Consumer Sentiment +0.6 pts to 79.6 (Feb. P)—but no improvement in inflation expectations.


The Bad:  Retail Sales -0.8% (Jan.)—and control group -0.4% Consumer Prices pick up to +0.3% (Jan.)—and core +0.4%, supercore +0.8%; Producer Prices +0.3% (Jan.)—services +0.6%; Import Prices +0.8% (Jan.); Industrial Production -0.1% (Jan.)—and capacity utilization rate -0.2 ppts to 78.5%; Housing Starts -14.8% to 1.331 mln a.r. (Jan.)—weather-related; Building Permits -1.5% to 1.470 mln a.r. (Jan.); NFIB Small Business Optimism -2.0 pts to 89.9 (Jan.); Budget Deficit widened to $532 bln (Oct.-to-Jan.); Global Investors sold a net $142.0 bln in U.S. securities (Dec.).



'ABSOLUTELY GROSS': Maggots from overhead compartment fall on flight passenger

The flight to Detroit from Amsterdam was forced to turn back

A flight heading to Detroit from Amsterdam was forced to turn back after maggots fell from the overhead cabin onto an unsuspecting passenger.

Baggage containing rotting fish apparently broke open and the critters rained down during the Delta flight on Tuesday, according to a Reddit post.

People in the affected area were moved away from the disgusting scene as the plane turned around one hour into the flight and headed back to Schiphol airport.

One man said he witnessed the maggots falling on a woman sitting across the aisle from him.

“She was freaking out,” Philip Schotte, who lives in Iowa but is from the Netherlands, told Fox affiliate WJBK in Detroit. “She was just trying to kind of fight off these maggots.”

Schotte said he counted at least a dozen wiggling critters that dropped from the baggage. He initially thought it was a prank.

“I don’t really know what was going through my mind,” Schotte said. “I was trying to process it – disgust is one thing of course. We had to wait there for help to actually come.”

Another passenger said their family was sitting in the row directly in front of where the maggots fell.

“The lady right behind us told the flight attendants the maggots were falling on her head,” a traveller named Kelce told Britain’s Daily Mail. “I turned around and they were wiggling around on the seat.

“They moved us further in front, though. One of our carry-on bags was right nearby the disgusting one so at the end of the flight when I went to get it after checking it over thoroughly, the passenger in question was still sitting there and didn’t exit the plane.”

After the plane returned to Amsterdam, the flight crew identified the owner of the offending baggage and detained them, the passenger said.

“Some kind of consequences but unclear what. Also apparently it was wrapped in newspaper. Absolutely gross.”

The overhead cabin and seats in the area were thoroughly cleaned and the rotting carry-on was placed in a bag to be incinerated.

The passenger added the airline gave travellers 8,000 air miles, hotel room compensation and a $30 meal ticket if they were delayed overnight.

Delta policy allows for food to be brought on flights, but only if it is wrapped properly and isn’t dangerous to transport.