Inflation Hits Wages

Comparing today’s Consumer Price Index figures for July 2008 with Labour Force Survey figures for the same month reveals that the annual increase in Canada’s average hourly wage (4.0%) barely exceeded the annual increase in Canadian consumer prices (3.4%). As a result, real wages rose by only 0.6% over the past year.

In fact, relative to inflation, workers in Ontario and Nova Scotia are being paid less today than a year ago. Real wages have been completely stagnant in Quebec. In other words, about two-thirds of Canadian workers live in provinces where inflation has equalled or exceeded nominal wage increases from July 2007 through July 2008.

Real wages rose most in Prince Edward Island (4.8%), Saskatchewan (4.6%), and Newfoundland and Labrador (3.6%). Wage gains in PEI are particularly good news because this province has the lowest average hourly wage of any province. However, monthly figures for such a small province must be taken with a grain of salt. Wage gains in Saskatchewan and Newfoundland are overdue because recent resource booms in these prices have increased corporate profits more than employment income.




Real Wages













































Today’s Consumer Price Index release is the last one before the Bank of Canada announces interest rates on September 3. Many commentators had argued that the Bank needs to raise or maintain interest rates to quell inflation in western Canada, despite the pressing need for economic stimulus in central and eastern Canada. For many months, inflation had exceeded 2% only in Alberta and Saskatchewan.

Today’s figures show inflation much more evenly spread across the country. From June to July 2008, consumer prices actually fell in Alberta and Saskatchewan, bringing annual inflation in these provinces into line with the national average. The changing regional distribution of inflation reflects changing causes of inflation.

When Canadian inflation was concentrated in Alberta and Saskatchewan, it could reasonably be attributed to economic booms in these provinces. Economists generally believe that central banks can limit this type of “demand-pull” inflation by raising interest rates.

Now that inflation is evenly spread across Canada, it cannot be attributed to an economic boom. Instead, consumer prices are higher everywhere because global commodity prices are higher. Economists generally agree that central banks cannot control this type of “cost-push” inflation.

Certainly, Bank of Canada interest rates will have no meaningful effect on the price of gasoline, food and other global commodities. Overall inflation, which includes these items, now exceeds the Bank’s target range of 1% to 3%. However, core inflation, which excludes these items, remained at only 1.5% for a fourth consecutive month.

In other words, the type of inflation that the Bank of Canada can control is at the lower end of its target range. This means that the Bank can and should cut interest rates after Labour Day to mitigate Canada’s slowing job market. Only a stronger labour market and higher wages can protect ordinary Canadians from higher global prices.

UPDATE (August 22): Toronto Star and CanWest coverage

UPDATE (August 25): In terms of this blog offering tomorrow’s conventional wisdom today, here are some excerpts from today’s Globe and Mail editorial on inflation:

The Bank of Canada cannot hope, by tightening credit and raising interest rates, to cool down any overheating outside Canada, let alone to increase inventories of gasoline and fuel oil.

Statistics Canada’s figures on consumer prices for July, released on Thursday, are particularly informative in the comparison among the provinces.

. . .

If excess demand were the problem in Canada, then Alberta would have the worst inflation.

On the contrary, Ontario and three of the Atlantic provinces, where growth is weak, have high rises in consumer prices, and these are largely due to gasoline and fuel oil.

. . .

The regional breakdown in price-level changes goes to show that Canada is not suffering from any overheating of our own, let alone from 1970s-style inflationary expectations. The practical conclusion is that a credit squeeze or higher interest rates would not benefit us.

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