Economy in Brief: March 2023

Consumer confidence in Denmark in March improved slightly, moving up to -23.1 from -25.1 in February after logging a -26.1 in January. These improvements are not strong, but they are movements toward ‘better’ rather than toward ‘worse.’ The absolute reading is extremely weak with the ranking of 2.7% on data since 1995. That means that since 1995 readings have been this weak or weaker only 2.7% of the time.

The past year… The data assessing conditions over the last 12 months are generally quite weak; the financial situation for the last 12 months has a 0.6 percentile standing. The general economy reading for the last 12 months has a 3.3 percentile standing. The assessment of consumer prices over the last 12 months, of course, has a high 97-percentile standing telling us that inflation had been higher historically only about 3% of the time. That's not surprising and it's not good news. That summary sets the stage for the responses for this month.

Looking ahead The look-ahead responses from March show the financial situation for the next 12 months slightly stronger at a net 0.4 reading, up from -0.3 in February, but still with only a 3.6 percentile standing. The outlook for the general economy improved to -0.7 in March from a -6.4 reading in February, logged at a 38.8 percentile standing much better than the other standings noted to date; however, it is substantially below the 50% break even mark. Consumer prices over the next 12 months have a -8.5 assessment for March below the -8 assessment for February; the standing for this metric is the 27th percentile which is certainly a lot weaker than the 97th percentile standing for the previous twelve months. There is some expectation that inflation is going to be coming down; it is hard to tell from this whether that sort of decline is sufficient or not. The unemployment trend expected for the next 12 months has a lower net 18.6 reading in March, down from 28.4 in February (which had a small uptick compared to January). The standing still has an 87-percentile mark which is relatively high.

The environment Assessments of the environment in March change very little from February. All responses have rankings below historic midpoints (below 50%). The favorability of the time to purchase improved slightly to -39.6 in March from -41.8 in February; the favorability the time to purchase over the next 12 months improved to -15.5 from -17.9. The favorability of the time to save ticked ever so slightly higher to 64.4 from 64.3; the March favorability of the time to save over the next 12 months eroded to 22 from 23.8 logging a lower 10-percentile standing. The general financial situation of households is unchanged at 19.8, a 2.4 percentile standing. The environment is weak.

The chart on U.K. CPIH core inflation rate that looks at annualized sequential growth rates of inflation over 12 months, six months and three months shows some remarkable stability. High inflation rates remain in force in the U.K. across horizons. All the different tenors show some slight tendency toward deceleration; however, there's a pronounced flat spot after the acceleration of inflation in early-2022. This ‘flat spot’ embodies a weak downslope that has an extremely mild downward gradient. It is nothing like the speed with which inflation had accelerated in the U.K. It's hard to imagine the authorities would be content with inflation declining at the speed depicted by gradient in this chart. The Bank of England clearly is going to feel that it needs to do more, that it hasn't done enough, that inflation is not declining rapidly enough, and remains too high. The headline and core gains in February underscore those statements.

Got banking issues? On the other hand, there are banking issues. The events in the United States do not reflect something that would have simply passed over the United Kingdom on the way to Switzerland. Any bank operating in the global environment has faced the same circumstances. They've operated in a very low inflation, low interest rate environment. The inflation rate rose sharply. During this period, monetary policy did not react much to the inflation. Suddenly central banks got religion and started raising interest rates. This would have put a great deal of pressure on any security held as the banks would have purchased them under the conditions of a lower interest rate environment. While we can assume that more sophisticated banks have operated more smoothly during this environment, employing various strategies including hedging and the use of financial futures, undoubtedly there are a number of less sophisticated institutions that didn't act that way, didn't see the rate hikes coming, and that may have doubted that the central banks were going to take the aggressive actions they eventually did take. To the extent that there was any denial in the trading room it has been replaced with losses.

Central banks making decisions about policy have to be concerned about the condition of financial institutions under their purview. So far, the Bank of England assess no risk to the U.K. banking system.

Headline inflation in the U.K. shows clear deceleration. The CPIH is at 9.2% over 12 months, declining to an 8% pace over 6 months and to a 6.6% annual rate over three months. For headline inflation, the deceleration is in gear. However, for the core inflation rate, the year-over-year pace is at 5.8%, the six-month pace edges down to only 5.6%, and then, what's worse, is that the three-month pace edges back up to 5.8%. Inflation over this period barely budges. And a 5.8% inflation rate is too high.

The diffusion calculations on the categories in the table show that monthly month-to-month inflation rates are accelerating more than they're decelerating. Diffusion in February is up to 63.6% which says that inflation is accelerating in more categories than it's decelerating. In January, diffusion was 54.5% which also shows net acceleration anything above 50% shows an accelerating tendency. In December, the diffusion index had been better behaved at 45.5% showing a slight tendency for more categories to decelerate than to accelerate.

Sequential diffusion is a little bit kinder to the trends over 12 months diffusion is that 63.6% showing that inflation clearly has accelerated over 12 months compared to 12-months ago. Diffusion over six months compares inflation over six months to the pace over 12 months: here we see a decline in diffusion to 9.1% indicating a sharp tendency to decelerate over six months compared to 12 months (that was not reflected in the pace of either headline or core inflation). However, over three months that marked pace of deceleration in diffusion no longer exists; instead, there is lingering deceleration with a diffusion index of 45.5%. It is rather more modest and only slightly below the neutral 50% mark. And as we just saw, the monthly figures are showing that inflation is accelerating month-to-month so it's not clear exactly how much stock we should place in this three-month index. The headline, remember, showed that inflation had cooled from an 8% pace to a 6.6% pace, but the core had found that inflation accelerated slightly to 5.8% from a 5.6% pace. Diffusion is an unweighted concept looking at the unweighted breadth of acceleration across categories. The main thing that the data are telling us over three months and in the recent months is that there is no strong tendency for inflation to decelerate; the monthly data warn of further acceleration.

U.K. macro data have been a bit touch and go, but the unemployment rate continues to show a tight labor market. But the December rate of unemployment at 3.7% among some of the lower rates we've seen in recent months.

Inflation remains a global phenomenon running at a very high pace in Europe and it's running strongly in the United States. The U.K. core shows little tendency to decelerate, and we also see stubborn inflation in Canada, and even Japan has acquired some inflation although it's skeptical about the longevity of the rate that it's experiencing today.

Canada's inflation trends are looking a lot like the trends in the United States. The headline inflation rate has rolled off relatively sharply. The year-over-year pace is 5.3%; that falls to 3.3% expressed at an annual rate over six months. The annualized pace logs a 1.6% gain over three months. Magically inflation goes from extremely strong to under the pace prescribed by its target. Canada’s CPIx, which excludes the most volatile components of inflation, shows a 4.9% increase over 12 months, a 3.7% annual rate increase over six months and a slightly slower 3.4% annual rate increase over three months. Those metrics track closely the U.S. CPI path. Meanwhile, Canada's core CPI rate (excluding food and energy) shows a 6% gain over 12 months, a 4.3% annual rate increase over six months and a 4.1% annual rate increase over three months that echoes the pattern of the U.S. core. Although Canada has a lower inflation rate on each of its shorter horizons compared with the U.S. core with the three-month inflation rate pace that's a percentage point below the 3-month pace in the U.S., Canada's year-over-year pace for the core is 1/2 of one percentage point higher than in the U.S. It's too soon to say exactly what this means in terms of policymaking and whether we should be paying more attention to the year-over-year pace or to the 3-month pace. But the differences here are not huge.

When the 3-month inflation rate drops sharply, it's an encouraging sign about where inflation is headed next. However, it is not a guarantee. The ‘problem’ with annualized 3-months inflation is that the series is volatile. A drop in inflation over 3 months is a welcome signal, but it is not one that can be relied on up. That is the policy dilemma.

Canada’s year-over-year inflation rate on the CPI peaked at 8.1% in June and has declined to a pace of 5.3% in February. The CPIx pace that excludes the six most volatile items peaked at 6.2% in June and is down to a pace of 4.7% in February. Canada’s core CPI peaked at 5.5% in July and is down to a 4.9% pace in February, the same as its year-on-year pace in January.