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Inflation and Labor Markets

Inflation has peaked in major regions, but the pace of core inflation's decline remains uncertain. Labor markets in the US and Canada are healthy but showing signs of loosening, with job additions slowing down and unfilled vacancies decreasing.

Inflation has clearly peaked in most major regions.  However, how quickly core inflation subsides towards central bank targets is still an open question and the subject of much debate.

In the US, headline inflation has declined significantly from peaks while core inflation has declined at a slower pace.

On a YOY basis, US headline CPI growth declined to 3.0% in June 2023 vs. the 9.1% peak experienced in June 2022.  On a MOM basis, US headline CPI increased by 0.1%.

The sharp declines in headline CPI have primarily been driven by sharply lower food and energy costs.  The decline in energy prices may prove transitory as oil prices may surge as the summer months and peak driving season nears.  

Encouragingly, core CPI inflation is also beginning to decline at a faster pace.  Core CPI increased by 4.8% YOY in June 2023 (down from a 6.6% peak in September 2022) and 0.2% MOM (down from 0.4% increases in previous months). 

Services inflation declined to 6.3% YOY and 0.3% MOM.   However, these figures are artificially increased by shelter costs (lagging indicator as these do not reflect current new rental leases).   

Excluding housing, services inflation slowed to 4.0% YOY and was flat MOM.   

Additionally, producer prices paid data has also proved encouraging with increases at only 0.1% MOM and 2.6% YOY in June.  

In Europe, headline inflation has declined significantly while core inflation remains high.

Headline CPI has declined to 5.5% YOY in June (down from 10.7% peak in October) but Core CPI remains high at 5.4% YOY (vs. a 5.7% March 2023 peak).   On a MOM basis, core CPI came in at 0.3%.

Canada’s inflation data is trending positively. 

Headline CPI declined to 2.8% YOY in June 2023 (down from 8.1% peak in June 2022).   Core CPI declined to a lower-than-expected 3.2% YOY and 0.1% MOM (for the second straight month).  

Labor markets are still healthy in the US and Canada but are showing signs of loosening.

The US added 209K jobs in June, down from the 306K added in May.   Over the past five months, the US has added an average of 240K jobs monthly.

However, unfilled job vacancies have remained under 10 million for three out of the past four months (well below peaks of 12 million in February 2022).   Additionally, monthly quit rates of 2.6% are closer to the lower pre-pandemic averages.

Businesses are increasingly citing improved conditions surrounding labor availability.

Wage growth declined to 4.4% YOY and 0.4% MOM.  This level is still above the 3%-3.5% level the Fed deems necessary to achieve 2% annual inflation overall.    

Canada’s employment market remains robust with 60K jobs added in June.   The unemployment rate ticked up to 5.4% from 5.0% early in the year due to increased labor market participation.

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