Where’s the Inflation Threat?

Earlier this month, the Bank of Canada raised interest rates ahead of its original schedule to head off inflation. Some commentators are calling for further rate hikes in the near future. But today’s Consumer Price Index suggests that inflation is not an impending threat.

Adjusting for seasonal factors, consumer prices were lower in May than they had been in April. The overall inflation rate dropped from 1.8% to 1.4%. The Bank of Canada’s core inflation rate slipped from 1.9% to 1.8%. By any measure, the spectre of inflation receded.

However, actual and prospective interest rate hikes have aggravated a more serious problem: the exchange rate. The notion that Canada will raise rates, even as the US stands pat, encourages currency traders to bid up the Canadian dollar.

Indeed, the loonie has increased from under 93 US cents on May 25 to above 98 US cents yesterday. This appreciation works against a recovery in Canada’s export industries.

According to the OECD’s latest figures on purchasing power parity, the Canadian dollar should be worth 82 US cents. For Canada, an overvalued currency is a greater economic threat than inflation. At a minimum, the Bank of Canada should signal that it will not raise interest rates in the near future.

3 comments

  • And to have Flaherty come out yesterday saying he has no problem with a high dollar. Gees, how did this guy get to be finance minister. There is a real disconnect between policy direction and actual on the ground needs. Is anybody in the manufacturing sector, in terms of policy wonks alive? Not a word, hmmm, I bet if this were a liberal or NDP finance minister you would see the roof blown off the finance department barn.

    When our double dip hits in Canada, it will be in large part, self made, you can be assured of that. As stated previously, there are many other policy options to cool off the housing market rather than just raising rates. A hot housing market, is not always a case of inflationary pressure, in fact, in the age of debt financed consumption, it is more about, rule and regulations concerning the issuing of debt, rather than straight out rates. Personal financial leveraging, to me is more of an issue today than anything, and we are approaching that wall when it comes to consumption, and all higher rates will do is eat into the consumption that is so vitally needed to add to a global rebound.

    So raising rates and austerity measures, the two that are being preached by our Tories at the upcoming G20, are the anti-thesis of recovery.

    Did anybody see those horns growing on Harper’s forehead, potentially he is being seen more than just the anti-thesis, maybe we need a priest to perform a ceremony on him- something has gone wrong with him! I swear I seen his head turn 360 degrees around at one of his last Q&A’s.

    lol.

  • A couple thoughts:

    – You’re assuming past inflation is an indication of future inflation. Isn’t that a classic fallacy in markets — that what happened in the past will continue in the future?

    – I’m guessing another reason why the Bank might want to raise interest rates is to give it some wiggle room. Interest rates are, in the grand scheme of things, very low. If the economy takes a dip for the worse in the near future, the Bank probably wants to have some room to lower the interest rate to heat things up a bit.

  • I am not so sure about your second point. For me it is not where the rates are currently sitting, it is where they are going and the signals that actually matter. So the wiggle room you speak of comes at a huge cost, as more than half the arm chair economists and the neo-cons feel we are actually getting out of recessionary territory.

    So it is the directional issue that to is the problems here and the message it sends the international community, however small that might be. Given the Us held rates again, makes the point even more pristine, it is the movement that matters right now. And the signal Harper (Carney) just gave out to the financial community is dangerous. What would it have cost to leave them sit where they were. Nothing, but it will cost us, in terms of psychological space which translates through the cultural tethers to the in the ground investment and purchasing decisions. So I very much disagree with you second point and again, it can become a dangerous job killing, recover smothering artifact.

    Where is the priest! If I can’t convince people Harper is most likely the anti-christ then maybe I can at least get a few prays for all the jobs that will be killed and have been killed or precariousized.

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