Wishful thinking won’t slow inflation

Opinion

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This article was published 16/02/2023 (961 days ago), so information in it may no longer be current.

Bank of Canada governor Tiff Macklem’s pause in interest-rate increases was good news for borrowers — while it lasted. Job growth in Canada reported last Friday, however, signalled the pause may not last long.

Statistics Canada’s Labour Force Survey issued Friday showed total employment in Canada rose by 150,000 jobs in January. This continued an upward trend in total employment that began in September 2022, with cumulative gains totalling 326,000 jobs.

The Bank of Canada has raised interest rates quickly and massively in order to curtail Canada’s inflation. In seven successive rate-setting decisions starting in March 2022, the bank has raised its policy rate to 4.5 per cent today from 0.25 per cent 11 months ago.

The purpose of these interest-rate increases was to squeeze households and businesses so they would have less to spend on goods and services. They would therefore — so the theory goes — stop bidding up prices.

Such measures were required because annual consumer price inflation in Canada is now running at 6.3 per cent. This inflation rate reflects a retreat from the 8.1 per cent peak reached last June, but remains far above the bank’s target inflation rate of two per cent per year.

The job growth reported last Friday, however, showed employers are not, on the whole, feeling the intended squeeze. They are expanding their businesses in a way that is likely to drive up wages and prices.

Macklem and his deputy governors decided at their January rate-setting meeting that they would raise their policy interest rate by another quarter-point to the present 4.5 per cent and leave it at that. A pause was needed, they thought, to see what effect seven successive increases would have on the pace of economic expansion and the likelihood of further inflation.

They reasoned in mid-January that supply-chain difficulties had largely been resolved since Chinese manufacturers raised production back toward normal levels and scarcity of petroleum products was being resolved. Households would soon be renewing mortgages at much higher rates. Consumer confidence was at a low ebb. Therefore, they reasoned, the intended squeeze would be felt soon.

Last week’s Labour Force Survey dumped a bucket of cold water on their optimism. It showed employers were still hiring and workers were still bidding up wages, as they have been doing for most of the last year. The causes of inflation are therefore still hard at work in Canada.

In the United States, Federal Reserve Board chairman Jerome K. Powell and his colleagues raised their interest rates by one-quarter of a point in January. They restated their view that further increases would be needed to bring the inflation rate down to the two per cent target. They gave no hint of any pause such as Macklem and the Bank of Canada had in mind.

Employment numbers in both Canada and the U.S. suggested Powell was on the right track. Concrete results in Canadian industry have failed to confirm Macklem’s wishful thinking.

It is still possible that the next report on consumer prices will show Canada’s inflation problem is taking care of itself, as the Bank of Canada has been hoping. That, however, would be a surprising result. Canadian industry’s hiring spree continued through its fourth month in January. Wishful thinking is unlikely to slow it down.

» Winnipeg Free Press