If there’s anything we’ve learned over the past year, it’s that central banks are pretty bad at predicting inflation. Which can be cause for hope.
When Bank of Canada Senior Deputy Governor Carolyn Rogers warned Wednesday — the same day Statistics Canada inflation data shocked nearly everyone with a jump to levels not seen since 1983 — that there was worse inflation to come, she may or may not have been right. After failing to forecast the current surge in inflation, the bank’s balance sheet speaks for itself.
“We know inflation keeps Canadians up at night. It keeps us up at night, and we won’t have a quiet rest until we get it back on target,” Rogers said in part of a fireside chat hosted by The Globe and Mail on one of the hottest days of the year so far.
That’s why, she said, the Bank of Canada is raising rates “quite aggressively.”
WATCH | Companies, consumers are struggling to cope with inflation:
The end of inflation?
Rogers and the Bank of Canada are by no means the only ones who see a bleak future where prices keep rising (“the transient team has disbanded,” Rogers joked). But there are other voices, and it might be time to look for signs of a little optimism, if only on the principle that it always gets darker before dawn.
Because unless you are convinced that inflation is permanently out of control and that the price of everything will continue to rise forever, inflation must ultimately be transient at some point. The question is: when is this point?
A UK railway strike and new data showing Canadians increasingly expect inflation to persist are worrying indicators of what the future holds. But just this week there have been counter signals that some of the main drivers of inflation – food, oil and supply chain disruptions – may be starting to heal.
Meanwhile, although retail sales have yet to see a strong impact from the higher cost of borrowing imposed by central bank rate hikes, Canadian real estate has – something Rogers has seen in the warmth of his imaginary home.
Looking first at the bleak outlook, the strike that has halted transport across Britain is a potential warning of the kinds of forces that could drive up wages, and therefore prices.
Fighting for lost purchasing power
“Our campaign will last as long as necessary,” said Mick Lynch, general secretary of Britain’s Rail, Maritime and Transport Workers, this week. With a management wage offer of 3% amid inflation above 9%, there are fears that the transport strike could trigger another “summer of discontent”, as public sector unions, including the health, are struggling to regain lost purchasing power.
So far, there are few signs of this kind of disruptive labor action in Canada, and governments may decide to try to appease workers before it gets that far. Federally regulated dairy farmers, for example, have obtained mid-year price increase.
As Rogers reiterated on Wednesday, inflationary expectations, the belief among workers and businesses that prices will continue to rise, is one of the things central banks fear most.
A recent report from the Conference Board of Canada offers both good and bad news on this subject. New June data shows Canadian expectations for one year ahead”jumped up“, but the three-year expectations have diminished, showing that many Canadians could still be part of the transitional team.
While core inflation has risen further in the latest data from Statistics Canada, there remain a few key commodities whose rising prices are the benchmark for our inflation fears.
Prices at the pump hit new highs during last month’s data collection, but gas buyers know that this month prices, while still unpleasantly high, have come down significantly so far, this which means that all other things being equal, the inflation figure could be lower next month.
An adjustment to the statistical agency’s goods basket to include prices for new and used vehicles while increasing the housing weight should result in a one-time increase that may fade in future monthly data.
WATCH | Where is inflation hitting the hardest? :
Slow down don’t clap
Some of the most encouraging price data came this week from food analysts Agritel, which showed that the world price of grains and oilseeds had started to fall, although one of the reasons for the decline , the fear of a recession, is not entirely encouraging. This shows that rapid rate hikes have an impact.
Although prices remain relatively high, food producers around the world, including in Canada, are likely to plant pole to pole to take advantagehelping to bring prices down if the weather cooperates.
Likewise, even as US President Joe Biden promises to cut gasoline taxes, the price of oil has started to fall. Despite a reluctance by consumers to drive less in the U.S. and Canada, commercial users continue to seek efficiency gains as rising interest rates and a declining economy threaten, even as oil producers look for new sources.
WATCH | Biden plans to freeze gasoline taxes to lower prices at the pump:
Clarence Woudsma, author of Freight, land and local economic development and associate professor at the University of Waterloo, notes that while shipper fuel consumption increases faster than GDP when growth picks up, the reverse may apply when the economy declines.
“Sometimes trucking statistics are seen as some kind of canary in the coal mine,” Woudsma said. “If we go into a recession, companies stop placing orders or adjust their inventory because they see what’s coming in the next quarter.”
This is perhaps even more true in the wake of recent supply chain challenges faced by North American companies. Shortages prompted companies to fill their warehouses when they could. They must now try to unwind these excess stocks, inadvertently helping to relieve the transport capacity needed for other still scarce inputs.