Inflation: The 1% Menace?

Between May and June, consumer prices decreased in both absolute and seasonally-adjusted terms. As a result, the annual inflation rate fell to 1.0%, about half what it had been at the start of this year.

One province, Manitoba, actually slipped into deflation. The Bank of Canada’s core rate edged down to 1.7%.

Monetary Policy

Inflation’s continuing decline begs the question of why the Bank of Canada raised interest rates again earlier this week. Higher interest rates are supposedly needed to quell inflation, but the inflation menace is essentially nonexistent. Meanwhile, the slowing recovery suggests that the Canadian economy could use all of the stimulus it can get.

Real Wages

Today’s release of June inflation figures allows a comparison with the June wage figures from the Labour Force Survey. It is a battle of weaklings.

Although inflation was anemic, wage growth was even weaker in some provinces. Ontario experienced by far the highest provincial inflation at 1.6%, but its average wage rose only 0.8% over the past year. The Ontario government’s attempt to freeze public-sector compensation at 0% for two years threatens to widen this gap between inflation and pay.

Meanwhile, New Brunswick’s 1.0% inflation exceeded its 0.8% wage increase. Alberta had just 0.6% inflation, but that was triple its 0.2% wage increase.

UPDATE (July 24): Quoted by Canadian Press