If there is anything we’ve learned over the past year it’s that central banks are pretty bad at predicting inflation. Which may be a reason for hope.
When Bank of Canada Senior Deputy Governor Carolyn Rogers warned on Wednesday — the same day Statistics Canada inflation data shocked nearly everyone with a jump to levels not seen since 1983 — that there is worse inflation ahead, she may or may not be right. After failing to foresee the current spurt of inflation, the bank’s record speaks for itself.
“We know inflation is keeping Canadians up at night. It’s keeping us up at night, and we will not rest easy until we get it back down to target,” said Rogers as part of a fireside chat organized by the Globe and Mail on one of the hottest days of the year so far.
That is why, she said, the Bank of Canada is raising rates “quite aggressively.”
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The end of inflation?
Rogers and the Bank of Canada are by no means alone in seeing a gloomy future where prices keep rising (“team transitory has disbanded,” quipped Rogers). But there are other voices, and it might just be time to look for signs of a bit of optimism, if just on the principle that it is always darkest before the dawn.
Because unless you are convinced that inflation is permanently out of control and the price of everything will keep rising forever, inflation must be ultimately transitory at some point. The question is: when is that point?
A British rail strike and new data showing Canadians really are increasingly expecting inflation to persist are worrying indicators of what the future may hold. But just this week there have been counter-signals that some of the main drivers of inflation — food, oil and supply-chain disruptions — may be starting to heal themselves.
Meanwhile, though retail sales have not yet seen a strong impact from the rising cost of borrowing imposed by central bank rate hikes, Canadian real estate has — something Rogers observed from the heat of her imaginary fireside.
To look at the gloomy perspective first, the strike that shut down transport across Britain is a potential warning of the kinds of forces that could push wages, and therefore prices, higher.
Fighting for lost spending power
“Our campaign will run for as long as it needs to run,” Mick Lynch, secretary general of Britain’s Rail, Maritime and Transport Workers, said this week. With a management wage offer of three per cent amidst inflation above nine per cent, there are fears the transport strike could begin a new “summer of discontent,” as public sector unions, including the health sector, battle to regain lost spending power.
So far there are few signs of that kind of disruptive labour action in Canada, and governments may decide to try to placate workers before it gets that far. Federally regulated dairy farmers, for example, have been granted a mid-year price increase.
As Rogers reiterated on Wednesday, inflationary expectations, the conviction by workers and businesses that prices will keep going up, are one of the things central banks fear the most.
A recent report from the Conference Board of Canada offers some good news and bad news on that front. Fresh June data shows Canadian expectations for one year ahead “popped upward,” but three-year expectations declined, showing that many Canadians may still be on team transitory.
While core inflation rose again in the latest Statistics Canada data, there remain a few key products whose rising prices are benchmarks for our inflationary fears.
Prices at the pumps hit new highs when last month’s data was being collected, but gas-buyers know this month, prices, while still unpleasantly high, have dropped significantly so far, meaning other things being equal the inflation number could be lower next month.
An adjustment to the statistical agency’s basket of goods to include new and used vehicle prices while upping the weighting of housing was expected to result in a one-time increase that could fade away in future monthly data.
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Slowing not cheering
Some of the most encouraging data on prices came this week from food commodity analysts at Agritel, who showed the global price of grains and oil seeds have begun to fall, although one reason for the decline, fear of a recession, is not entirely cheering. It does show fast-paced rate hikes are having an impact.
While prices remain relatively high, food producers around the world, including in Canada, are likely to plant fence-post-to-fence-post to take advantage, helping to push prices down if the weather co-operates.
Similarly, even as U.S. President Joe Biden promises to cut gas taxes, the price of oil has begun to slide. Despite a reluctance by consumers to drive less in the U.S. and in Canada, business users continue to look for efficiencies as rising interest rates and a declining economy threaten — even as oil producers look for new sources.
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Clarence Woudsma, author of Freight, land and local economic development and an associate professor at the University of Waterloo, notes that while fuel use by shippers rises faster than GDP when growth is picking up, the reverse can apply when the economy declines.
“Sometimes trucking statistics are referred to as a sort of a canary in the coal mine,” said Woudsma. “If we’re going into recession, businesses stop placing orders or they 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 faced by North American businesses. Shortages encouraged companies to fill up their warehouses when they could. They must now try to unwind those excess inventories, inadvertently helping to unclog transportation capacity needed by other inputs still in short supply.
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