If there’s one thing we’ve learned over the last year, it’s that central banks are pretty bad at predicting inflation. Which may be cause for hope.
When Bank of Canada Senior Deputy Governor Carolyn Rogers warned on Wednesday, the same day that Statistics Canada’s inflation data surprised almost everyone with a jump to levels not seen since 1983, that worse inflation is on the way, it may right or wrong. After failing to foresee the current bout of inflation, the bank’s track record speaks for itself.
“We know that inflation keeps Canadians up at night. It keeps us up at night, and we won’t rest easy until we hit the target again,” Rogers said as part of a Globe and Mail-hosted fireside chat. on one of the hottest days of the year so far.
That’s why, he said, the Bank of Canada is raising rates “pretty aggressively.”
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The end of inflation?
Rogers and the Bank of Canada aren’t the only ones who see a bleak future in which prices continue to rise (“the transient team has disbanded,” Rogers joked). But there are other voices, and it might be time to look for signs of a little optimism, if only on the principle that it always gets dark before dawn.
Because unless you are convinced that inflation is permanently out of control and the price of everything will continue to rise forever, inflation must ultimately be transient at some point. The question is: when is that point?
A British rail strike and new data showing Canadians increasingly expect inflation to persist they are worrying indicators of what the future may hold. But just this week there have been hints that some of the main drivers of inflation – food, oil and supply chain disruptions – may be starting to heal themselves.
Meanwhile, while retail sales have yet to be hit hard by rising borrowing costs imposed by central bank rate hikes, the Canadian real estate sector has, something Rogers noted in the heat of his imaginary fireside chat.
To look at the bleak outlook first, the strike that shut down transport in Britain is a potential warning of the kinds of forces that could drive up wages and thus prices.
Fighting for lost purchasing power
“Our campaign will last as long as it takes,” Mick Lynch, general secretary of Britain’s Transport, Maritime and Rail Workers, said this week. With a management wage offer of three per cent amid inflation of over nine per cent, it is feared that the transport strike could start a new “summer of discontent” as public sector unions, including the of health, struggle to regain lost purchasing power.
So far, there is little sign of that kind of disruptive labor action in Canada, and governments may decide to try to placate workers before it goes that far. Federally regulated dairy farmers, for example, have been granted a mid-year price hike.
As Rogers reiterated on Wednesday, inflationary expectations, the conviction of workers and businesses that prices will continue to rise, is one of the things that central banks fear most.
A recent report from the Conference Board of Canada offers both good and bad news on that front. New data for June shows that Canadian expectations for one year ahead “increased” but expectations for three years decreased, showing that many Canadians may still be on the transient team.
While core inflation rose again in the latest Statistics Canada data, there remain a few key products whose rising prices are benchmarks for our inflation fears.
Pump prices hit new highs when last month’s data was collected, but gasoline buyers know that this month, prices, while still unpleasantly high, have dropped significantly so far, meaning that, all things being equal conditions, the inflation number could be lower next month.
An adjustment to the statistics agency’s basket of goods to include new and used vehicle prices while increasing the weight of housing was expected to result in a one-time increase that could disappear in future monthly data.
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Slowing down without animating
Some of the most encouraging data on prices came this week from food commodity analysts at Agritel, who showed that the world price of grains and oilseeds has started to fall, although one reason for the drop, the fear of a recession, is not entirely encouraging. It shows that accelerated rate hikes are having an impact.
While prices remain relatively high, food growers around the world, including in Canada, are likely to plant from pole to pole to take advantage, which will help push prices down if the weather cooperates.
Similarly, even as US President Joe Biden promises to cut gasoline taxes, the price of oil has started to fall. despite a reluctance On the part of consumers to drive less in the US and Canada, business users continue to seek efficiencies as interest rates rise and threaten a declining economy, even as oil producers seek new sources.
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Clarence Woodsma, author of Freight, land and local economic development and associate professor at the University of Waterloo, points out that while fuel use by carriers rises faster than GDP when growth is picking up, the opposite can happen when the economy is down.
“Sometimes truck statistics are referred to as a kind of canary in the coal mine,” Woudsma said. “If we’re going to go into a recession, companies stop ordering or adjust their inventory because they see what’s coming in the next quarter.”
That may be even more true in the wake of the recent supply chain difficulties facing North American companies. The shortage encouraged companies to fill their warehouses when they could. Now they must try to undo those excess inventories, inadvertently helping to unclog the transportation capacity needed by other inputs that are still in short supply.