Marxists at CIBC?
The following excerpt is from the much-reported study released by CIBC last week:
The Bank of Canada, eying an economy operating above its non-inflationary speed limit, will welcome the dampening influence of an even stronger currency on both economic growth and inflation. A couple hundred thousand additional factory job losses, while far from derailing domestic economic growth, might be a route to opening up a bit of slack in todayâ€™s ultra-tight labour market, forestalling a more serious wage threat.
Describing the prospect of real wage increases exceeding 1% per year as “a more serious wage threat” seems overblown. As Andrew has explained, the notion of “todayâ€™s ultra-tight labour market” has been vastly overstated. However, the most interesting claim is that “a couple of hundred thousand additional factory job losses” are needed to hold down wages, which sounds quite similar to Marxâ€™s notion of a “reserve army” of unemployed workers.
Another interesting excerpt follows:
Core inflation, currently 2.5%, has proven surprisingly stubborn, and a resilient housing market suggests a longstanding source of upward pressure isnâ€™t yet prepared to fade from view. But the loonieâ€™s ascent will, with a lag, tame todayâ€™s too-hot inflation rate.
A stronger C$ has seen imported goods prices ease significantly relative to the currencyâ€™s low point in 2002, echoing results from the 1986-91 appreciation (Chart 11). Our earlier research on dollar-inflation sensitivies (sic) implies that a move from 87 cents at the end of 2006 to parity should chop off a half percentage point from underlying core inflation. Thatâ€™s enough of a correction to bring down todayâ€™s inflation rate to the Bank of Canadaâ€™s 2% comfort zone over the coming quarters. When it comes to monetary policy in Canada, the C$ will continue to do the heavy braking for the countryâ€™s central bank.
CIBCâ€™s contention seems to be that parity between the Canadian and American dollars is needed to reduce “core inflation” from 2.5% to 2.0%. Only days later, Statistics Canada revealed that core inflation fell to 2.2% in May. In other words,Â it declinedÂ by more than half of the desired amount even though the Canadian dollar moved less than one-quarter of the way to parity (from 88 cents in April to 91 cents in May). In any case, the whole argument is dubious since core inflationâ€™s jump to 2.5% in April was largely a fluke, albeit one likely to be repeated in June.
CIBC may be correct in forecasting that the Canadian dollar is headed for parity. However, there is little reason to believe that more manufacturing job losses and exchange-rate parity are needed to quell the 2.5% inflation menace.