Liberal Inflation Hawks?

In assessing the Bank of Canada’s Monetary Policy Report, John McCallum asked whether “the budget, with its large increase in spending, might be contributing to an overheating of the economy at this time?”

Similarly, in commenting on the Labour Force Survey, Doug Porter of BMO seemed concerned that a supposedly tight labour market and higher wages would spur inflation.

Today’s Consumer Price Index figures should temper these concerns. Inflation not only remained low, but fell slightly.

McCallum’s question was a particularly clear example of the Liberals being more conservative than the Conservatives on economic policy. The full text follows:

Hon. John McCallum (Markham—Unionville, Lib.):

Thank you, Mr. Chair.

First of all, I’d like to congratulate the governor for his great service to the country and for hitting the inflation target right on, I think, in his period in office, and for bringing a certain humanity to the Bank of Canada. I won’t go on further in this laudatory way, because I do have a couple of questions I would like to cover.

First of all, you were saying that, if anything, the inflation risk was a little bit on the upside. As you may have noticed, Andrew Coyne, in particular, has been saying that this is the biggest spending budget—a $25 billion increase in spending over two years—and that the percentage increase in government spending has been greater than the average under the past few years of the Liberal government.

So I guess my question is, in view of the fact that we have near record low unemployment and you’re saying that the inflation upside risk is a little bigger than the downside risk, do you have concerns that the budget, with its large increase in spending, might be contributing to an overheating of the economy at this time?

3 comments

  • CPI inflation fell, but core inflation – a measure that has been found to be a useful predictor for future CPI inflation – has been drifting up for several months now.

  • Stephen,

    You are completely correct that core inflation has increased. I have posted a story to that effect:

    http://progecon.wordpress.com/2007/05/17/wages-inflation-updated/

    However, I suggest that core inflation of 2.5 percent is neither “an overheating of the economy” (as McCallum said) nor good grounds for higher interest rates (as Porter implied).

  • Am I just a skeptic or is there something drastically wrong with how bankers, neo-cons, right wing think tanks read the numbers on our economy.

    Do we not have a melt down occurring in manufacturing and with that a continued trend towards low value adding/ low paying work.

    Does this trend not bother people and make them wonder about what the house will look like in a year or two.

    I do recall in the early 90’s during the end of the last recession a debate about how to build the high wage/ high value adding economy and how to avoid the low wage/ low value adding economy. Much of the debate centered on the type of investment that the country would attract and the type of investment that labour unions would strive to secure. With this current hollowing out of the economy and the types of low wage jobs that are replacing them, I wonder how it is that our politcial leaders can even think that inflation based on an overheated economy is even on the radar.

    If anything the inflation is being caused by the shock of high oil and energy prices. The economy with it’s high dollar is being sent a shock that will soon knock us on our ass. And hear our leaders are discussing overheated economy and raising interest rates? If they follow through on these rate increases, it’ll be the final death blow to the economy and accelerate a made in Canada/ USA recession that given the current adjustments in our manufacturing base will be more than we can handle. The dollars flipping around like a fish out of water at the whims of currency traders, needs to be contained ad it starts by, turning the media discussions about the economy on their head and focused on the true dynamics in the economy.

    P.S. I think this blog has been a great addition to the PEF cause. I am grateful for the insightful comments and articles.

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