A Tale of Two Inflations: Canada vs. Ontario
Of course, monetary policy should reflect the whole country. The national inflation rate decreasing to 1.7% in August begs the question of why the Bank of Canada has increased interest rates three times in a row. Higher interest rates are supposedly needed to control inflation, but there does not appear to be much inflation to control.
Although 1.7% is below the Bank of Canadaâ€™s 2% target, it actually overstates inflation by comparing post-HST prices in August 2010 to pre-HST prices in August 2009. Price increases from one-time tax changes should not guide monetary policy. Factoring out the HSTâ€™s introduction in Ontario and British Columbia would reveal a lower national inflation rate and even less justification for interest-rate hikes.
Given the HST, it is not surprising that Ontario inflation significantly exceeds the national average. It is ironic that the government of the province with the highest inflation rate has been among the most aggressive in proposing to freeze public-sector compensation.
Most provincial governments have been negotiating very modest wage increases with their employees. By contrast, the Ontario government is requesting a two-year freeze, which entails an appreciable pay cut relative to inflation. Reducing the purchasing power of the more than one million Ontarians employed in the broader public sector would be a drag on the provincial economy.