Inflation, Wages and Monetary Policy
This morning, Statistics Canada reported that the annual inflation rate rose to 1.8% in April.
Inflation and Wages
While inflation remains low, it is eating up almost all of the modest wage increases that workers have eked out over the past year. The Labour Force Survey indicates that the average hourly wage rose by 2.0% between April 2009 and April 2010. With 1.8% inflation, purchasing power only improved by a meagre 0.2%.
Inflation actually exceeded wage increases in three provinces. In Ontario, a 1.7% rise in the average hourly wage fell short of 2.2% inflation. Prince Edward Island parallelled Ontario with a 1.7% wage increase and 2.3% inflation. New Brunswick posted the worst numbers, with a 1.4% wage increase falling well below 2.9% inflation.
The problem is that wage increases have been weak. Government policies like Ontarioâ€™s attempted compensation freeze for the broader public sector threaten to aggravate this problem.
Inflation and Interest Rates
With inflation still below the 2% target, there is little apparent justification for the Bank of Canada to raise interest rates on June 1. Also, Aprilâ€™s 1.8% inflation was largely driven by higher energy prices. But we know that the price of oil has since dropped by some 20% from its April peak.
The core inflation rate, which excludes volatile prices like energy, was 1.9%. Again, this rate is below the 2% target.
The sensible policy would be to leave interest rates where they are for now. As I noted regarding the previous Consumer Price Index release, it is unclear why the Bank of Canada removed its conditional commitment to not raise rates before July. Fortunately, the central bank has not actually committed itself to raise rates on June 1.