The holiday season is a time to take a step back and appreciate all the great things in one’s life. For many this year the stockings hanging over the fireplace mantle may be a little lighter as inflation has affected many of the middle class’s Holiday shopping. Some good news may be around the corner.

Overall prices increased a small 0.1% month on month in November according to recent data published December 13th. Keeping with the Holiday spirit the data also demonstrated that core inflation (inflation that removes food and energy cost from the consumer price index basket) had slowed for the second consecutive month. Many of the pressures that have been pushing up prices seem to be subsiding.

Although this could be a sign that the actions of Central Banks are starting to take effect, we need to be careful. The market has been extremely reactive to good news of late, almost grasping at all indications of positive news only to suddenly get hit by reality once again. Inflation remains well above target in Canada at 6.9% and 7.1% for our neighbours in the south (headline inflation). Even if we exclude food and energy, we are still hovering around 6%. That being said, the disinflation registered in October and November is something to celebrate, a little, but not too fast. Like an office Christmas party, you want to sip at the egg nogg slowly otherwise you might get the party started a little too quickly.

Markets like the TSX and the S&P 500 have climbed at a steady pace since a rally began mid-October off the positive data. The markets also have other reasons to possibly rejoice. Both the Federal Reserve and the Governor of the Bank of Canada have become less hawkish. Both stipulating that they believe the end of monetary tightening is closer than the beginning. Most analysts had put the final Central Bank rates above 5%, Bond pricing now seems to point to a peak less than 5% (as of December 13th the FED rate was 4% and the BoC rate 4.25%). Prudence is still on the menu. Many media outlets and analysts following the last BoC rate hike expressed the opinion that rate hikes were essentially over. This prompted a statement from the Governor of the BoC Tiff Macklem the next day, stating that ‘’the BoC was not ready to end the cycle of monetary tightening and was still willing to act’’.

The most encouraging data was the indication that many of the consumer goods in short supply during the pandemic were now readily available. Prices for children’s clothing, cars, furniture, toys and TV’s had all declined. Looking ahead to the new year there is much hope that forces of deceleration will gain momentum. Housing prices have fallen measurably in many markets across Canada but have not been integrated to the data on inflation yet. Wage growth remains a concern, but many companies have decided to remove job postings, and some have even begun to cut on labour costs.

While the egg nogg slowly starts to take effect this Holiday season, that warm feeling combined with thoughts of a return to normal inflation may turn into a tiny headache the next morning as the conversation switches to slow growth and economic difficulties. Let’s enjoy the good news for now while preparing for a rocky 2023.

Happy Holidays!