The Wage-Price Squeeze
In August 2008, ordinary Canadians were squeezed by rising annual inflation andÂ slowing annual wage growth.
The decline in consumer prices from July to August 2008 (-0.2%) was smaller than the normal seasonal decline in prices between these months. (On a seasonally-adjusted basis, Statistics Canada estimates that consumer prices rose 0.2%.)
Compared to last month, the annual inflation rate edged up by 0.1% to 3.5%.Â At the same time, the annual growth in average hourly wages slowed by 0.2% to 3.8%.Â In real terms, Canadian workers were being paid only 0.3% more in August 2008 than in August 2007.
Of course, this national figure masksÂ important regional variations.Â Inflation significantly overtook wage growth in two provinces.Â In Ontario, real wages decreased by 0.7%, eclipsing the 0.1% decrease recorded last month.Â Real wages also fell by 0.9% in Nova Scotia.
In British Columbia, real wages stagnated with wage growth barely exceeding inflation.
The only large improvements in real wages occurred in Newfoundland and Labrador (4.4%), Prince Edward Island (4.6%) and Saskatchewan (4.0%),Â which have relatively little effect on the national average.
Rising energy prices accounted for half of the annual increase in consumer prices. With the core inflation rateÂ at onlyÂ 1.7%, well below the Bank of Canadaâ€™s 2% target, there is ample room to cut interest rates.
By expanding the US money supply, the bailout of the American financial system may place downward pressure on the US dollar. Indeed, the Canadian dollar shot up 1.5 cents relative to the American dollar yesterday. To moderate the exchange rate and keep Canadian exports viable, the Bank of Canada should cut interest rates.
Wages, Inflation, and Real Wages by Province, August 2007 â€“ August 2008
(Labour Force Survey and Consumer Price Index)
Canada: Â 3.8% – 3.5% = 0.3%
NL: 8.6% – 4.2% = 4.4%
PEI: 9.4% – 4.8% = 4.6%
NS: 3.5% – 4.4% = (0.9%)
NB: 4.8% – 2.6% = 2.2%
QC: 3.8% – 3.1% = 0.7%
ON: 2.8% – 3.5% = (0.7%)
MB: 4.6% – 3.4% = 1.2%
SK: 7.4% – 3.4% = 4.0%
AB: 5.3% – 4% = 1.3%
BC: 3.4% – 3.3% = 0.1%