Consumer prices continued to edge higher in the US in March, according to the Bureau of Economic Analysis’s Price Consumption Expenditures (PCE) Index, which came in at 0.5% for the month of March or 2.3% annualized for the year.
Removing volatile food and energy prices, the core reading saw an increase of 0.4% while surveyed economists were expecting a 0.3% increase. This represents an annualized value of 1.8%, a few ticks below the Fed’s 2% inflation target.
The PCE data also revealed that personal income increased a monstrous 21.1%, month-over-month. The increase is mostly attributable to the stimulus package passed in March that included an additional round of direct payments to consumers.
This will be the third time this year that the PCE reading has beat expectations. Fed Chair Jerome Powell remained firm on the Fed’s interest rate path and QE program on Wednesday, leaving traders with the uncomfortable feeling inflation could run away – and run away quickly.
With Core CPI numbers coming out approximately 10 days prior, the PCE gauge tends to take the back seat as traders already have a handle on the data. On the other hand, the PCE index is the Fed’s preferred measure of inflation because it directly measures goods and services targeted to and consumed by individuals.
In other news, Statistics Canada released its February GDP figures, posting a 0.4% increase when polled economists were expecting a 0.5% increase. The miss had a muted impact on the loonie, largely attributable to the staleness of the release.
February’s increase follows a 0.7% increase in January and more importantly, marks the 10th consecutive month of increases in the measure. This brings the Canadian economy to within 2% of GDP reported for February 2020, a month before the pandemic rocked the world.
When you pop the hood, 14 of 20 subsectors contributed to the increase. Retail trade rebounded by 4.5% after two months of declines. Some of the hardest hit service subsectors saw healthy gains, with clothing up 23.5% and hobby, book and music stores up 28.8%.
The manufacturing sector dragged the data down, contracting 0.9% for the month after January’s 2.2% increase. This continues the trend of alternating between increases and decreases as manufacturers have struggled with forecasting demand and therefore, what inventory levels are appropriate to stockpile.
StatsCan’s preliminary GDP figures for March indicate a 0.9% increase in real GDP in that month, bringing expected Q1 GDP growth to 1.6%. Naturally, this number is likely to be revised, but it serves as a benchmark for traders to place preliminary bets.
The GDP increase follows a very hawkish tone from the Bank of Canada last week, as the Bank tapered its QE program to purchase C$3 billion of bonds per week.
While the divergence between the two North American central banks is likely to persist in the short run, the Bank of Canada cannot move markets on its own and will likely need to eventually follow suit with the Fed.
Business Development Manager, Canada & Currency Analyst
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