'It's possible that we see the unemployment rate fall quite sharply': Doyle on Canada labour market

Key Concepts

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Core Inflation: Inflation excluding volatile food and energy prices, providing a clearer picture of underlying inflationary pressures.
• Core Services ex Shelter: Core services excluding shelter costs, a component increasingly scrutinized for inflationary signals.
• Owner’s Equivalent Rent (OER): The rent that homeowners would have to pay to rent their homes, a significant component of CPI housing costs.
• USMCA/CUSMA: United States-Mexico-Canada Agreement, a free trade agreement governing trade between the three countries.
• Tariff Pass-Through: The extent to which tariffs imposed on imported goods are reflected in higher prices for consumers.
• Fixed Business Investment: Spending by businesses on capital goods, such as equipment and structures.
• Break-Even Employment Growth: The level of employment growth needed to maintain a stable unemployment rate, influenced by population growth and labor force participation.

US Inflation & Economic Outlook: Analysis of January CPI Data

I. January CPI Report Overview

The January US inflation report indicated a year-over-year price increase of 2.4%. While slightly below analyst predictions, David Doyle, Head of Economics at McCory Group, characterized the numbers as “roughly in line.” The headline number was impacted by lower-than-expected gasoline prices, which are anticipated to rebound in the February report. The core inflation rate, crucial for monetary policy considerations, aligned closely with consensus estimates.

II. Core Services & Seasonality Concerns

A significant driver within the core inflation figure was a “steep acceleration” in core services excluding shelter. Airline fares were a major contributor to this increase. However, Doyle cautioned against interpreting this as a definitive trend, citing potential residual seasonality in the data and similar increases observed in January 2024 and 2025. He emphasized the need for cautious interpretation.

III. Housing Market Dynamics & Immigration’s Role

Housing costs, encompassing rent and owner’s equivalent rent (OER), showed moderate increases of 0.2-0.25% month-on-month. Year-over-year, these measures are nearing pre-pandemic levels, suggesting disinflation in the housing sector is in its “later innings.”

Doyle highlighted the critical role of immigration policy in influencing the US housing market. Recent changes in immigration policy have led to slower population growth and household formation, reducing demand and easing inflationary pressures on housing. He stated, “I think the big thing…relates to immigration policy…population growth household formation is much lower than than what it was previously and I think that's been a big factor that's taken a lot of the heat out of out of housing inflation.”

IV. Energy Price Fluctuations & Future Projections

Energy prices decreased by 1.5%, primarily due to a decline in gasoline prices in January. However, Doyle anticipates this effect will reverse in the February report, given the recent strength in oil prices and its subsequent impact on gasoline costs. He expects a “strong impulse” from gasoline in the next CPI report.

V. Goods Inflation & Tariff Impacts

The goods component of CPI was flat month-over-month, but Doyle noted this was somewhat misleading. Used car and truck prices, a volatile category, significantly contributed to the downward pressure. Excluding used cars and trucks, core goods inflation was strong at 0.4% month-over-month – the highest reading in three years. This suggests ongoing “tariff price pass-through,” reflecting the impact of tariffs on imported goods.

VI. Implications for Federal Reserve Policy

The January CPI report prompted a slight decrease in market yields, potentially indicating markets feared a worse outcome. However, Doyle believes the report is unlikely to significantly shift the Federal Reserve’s stance. He stated, “I don’t think these inflation numbers will sway hawks or doves one way or the other.”

He emphasized that the labor market will be a more significant driver of Fed policy. Recent positive employment data, including improved job growth trajectory and a lower unemployment rate, will be central to discussions at the March Fed meeting. Further employment reports before the meeting could alter this outlook.

VII. Canadian Economic Outlook & US Trade Relations

Regarding the Canadian economy, Doyle highlighted the importance of the US trade relationship, particularly the ongoing negotiations surrounding the USMCA (formerly NAFTA). The outcome of these negotiations could significantly impact fixed business investment in Canada.

Despite potential uncertainty surrounding USMCA, Doyle expressed optimism about Canadian fixed business investment, citing measures in the recent federal budget designed to accelerate investment, such as accelerated depreciation.

He also noted a shift in Canadian immigration policy, suggesting that break-even employment growth – the level needed to maintain the unemployment rate – could be as low as zero. This implies that even modest labor market gains could lead to a substantial decrease in the Canadian unemployment rate.

Conclusion

The January US CPI report presented a mixed picture, with inflation easing but potential for rebound in certain areas. While not dramatically altering the Fed’s immediate course, the data underscores the importance of monitoring both inflation and labor market dynamics. The influence of factors like immigration policy and trade relations (particularly USMCA) are critical to understanding the evolving economic landscape in both the US and Canada. The ongoing impact of tariffs on goods prices also remains a key consideration.