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 Canada’s core inflation rate is 2.1%.

Monetary Policy

Both measures are well within the central bank’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 Commission’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.

Wages

Although inflation remains moderate, wages have been even weaker. Over the past year, Canada’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.

5 comments

  • At the last CEA conference, during the Festschrift for Ian Stewart (new Directions for Intelligent Government in Canada), I seem to recall that one of the speakers (it may have been Pierre Fortin during his presentation) mentioned that the Government of Quebec had determined that the $7 per day daycare actually more than pays for itself. That it is actually a moneymaker in the short to medium term (due to the cost savings and higher tax revenue it results in for Government). William Watson added, I thought quite rightly, that social policy should be evaluated in terms of its intended social impact, not whether or not it is a money-maker for government.

    Nonetheless, I wonder if there is not a similar argument to be made for all-day kindergarten (apart I mean from general macroeonomic concerns about the futility of austerity in depression etc.).

  • Perhaps a better metric would be social benefit per net dollar spent.

    Social programs that have a net positive impact would be a no-brainer and we could go from there.

  • I believe similar arguments could be made for a fair amount of social housing–apparently, homeless people cost a bundle per year in emergency services, policing yadda yadda, rather more than the cost of making them not be homeless any more. Of course the conservative response would probably be to just let ’em die–no services, no cost.

    It’s been argued that for many social services, the real purpose of cutting them has nothing to do with saving money. The point is that the prospect of unemployment must be sufficiently frightening that it’s easier for employers to break unions and otherwise immiserate their employees–the workers have to be really sure that *anything* is better than being jobless, so wages and working conditions can be depressed with little resistance and profits can increase.

  • As soon as Interest rates are raised; the economy of Canada will go through massive deflation. Housing will collaspe in Canada, prices will fall, when rates are raised to a normal level. Housing in is far past the point of a soft landing. It is ready to explode, and will not explode till the cost of borrowing rises. Young Canadian’s who were encouraged to borrow at these levels are to be the first for slaughter as older canadians can try to retire off of increasing asset prices, supported only by the Bank of Canada actions.

    Inflation will continue to outstrip wages. Those on fixed incomes, salaries, wages will fail to keep up, and will work longer hours per day, month, year for goods and services. Leading to a backlash for all supporters of Inflation, that they will not enjoy!!!!

    Laquidity has to be withdrawn at some point, interest rates will rise, it will not be because of an healthy economy, improving economy. Prices for education, food, energy, even the healthcare will increase. Wages will lag prices in housing. It will resemble today where wages are lagging inflation by percentages greater then now. The middle class will be wiped out by rising prices.

    Stagflation anyone? Inflation ignore it at you’re own peril. So how is the average worker better off with the |CPI in the BoC range of 2%, interest rates are at record lows, and wages ae lagging prices, while unemployment is what again? While encouraging rates to stay low till 2014, which is a joke, which is killing my grandmother who lives on a fixed income. This policy is for A-Holes with no compassion.

  • Brandon L: interesting take, and you sound not far off what Warren Mosler has been saying. It sounds like buffer stock employment/a job guarantee system would solve most of the problems you identify.

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