Inflation and Drummond
Statistics Canada reported today that consumer prices jumped in January (by 0.4% or 0.5% seasonally-adjusted), offsetting the drop in December. As a result, the annual inflation rate is now 2.5% and the Bank of Canadaâ€™s core inflation rate is 2.1%.
Both measures are well within the central bankâ€™s target range, which should allow it to keep interest rates low and perhaps reduce them further if unemployment continues to rise. Since the last inflation report, the US Federal Reserve has pledged to keep its target rate near zero through 2014, providing a further argument for continued low interest rates in Canada.
An assumption underlying the Drummond Commissionâ€™s gloomy fiscal picture is that, starting in 2014, ten-year government bond rates will start rising faster than had previously been predicted by private-sector economists. Given the factors supporting low interest rates, this assumption is open to question.
Although inflation remains moderate, wages have been even weaker. Over the past year, Canadaâ€™s average hourly wage rose by 2%, lagging behind 2.5% inflation.
In Ontario, wages rose by only half the national average while inflation essentially equalled the national average. Over the past year, Ontario wages edged up just 1%, far behind 2.4% provincial inflation. Drummond-inspired austerity threatens to worsen this situation directly by limiting public-sector pay and indirectly by weakening the wider labour market.