High-price problems - Macleans.ca
 

High-price problems

Why the Bank of Canada can’t ignore the latest, surprise jump in the inflation rate


 
High-price problems

Richard Buchan/CP

The Oklahoma chapter of the American Automobile Association has been forced to respond to hundreds of extra calls from stranded motorists who decided to postpone their next fill-up after the price of gas soared over 19 per cent in the past three months. Meanwhile, in Florida, a gang of thieves reportedly stole six tractor-trailers full of tomatoes in an apparent bid to cash in on soaring prices of fresh produce.

There’s no shortage of examples these days as to how rising prices cause people to do odd things, and cause real instability. And it’s the reason why central bankers around the world, including in Canada, are suddenly waking up to a growing inflationary threat. In fact, it would appear the Bank of Canada (along with most economists) was caught off guard by recent data from Statistics Canada that showed the Consumer Price Index— which measures the price of everything from food to mortgage insurance—rising 1.1 percentage points in March, to an annual rate of 3.3 per cent. It was the largest monthly jump since Canada introduced the GST in January 1991, according to BMO Financial Group.

“We now have an inflation rate at 3.3 per cent and the Bank of Canada’s overnight rate at one per cent, which is the largest gap since the 1970s,” says Douglas Porter, BMO’s deputy chief economist. “Inflation is also now above the prime lending rates, which is three per cent. And that is highly unusual—we’re now in a situation where it almost pays to borrow.”

The main inflation culprits are food and energy prices, which tend to be volatile anyway. But even when those are stripped out of the equation, so-called core inflation is still above the Bank of Canada’s forecast. It could be a monthly blip, but it could also indicate that Canada’s economy has purged itself of any excess “slack,” meaning all the factories and businesses that were idled during the recession are now back up and running. Prime Minister Stephen Harper called the situation “worrisome,” but said the government’s fiscal plans will remain unchanged. It has all led to increased speculation that Bank of Canada governor Mark Carney could move to hike interest rates as early as next month if the trend continues.

It won’t be an easy decision, however. The global commodities boom that’s fuelled inflation pretty much everywhere in the world (and is just now beginning to hit the U.S., where unemployment remains high) is also driving Canada’s resource-based economy. As a result, the Canadian dollar is now trading at its highest level since 2007, around US$1.05. A further hike in interest rates would only add to the loonie’s rise. While that might be welcome news for Canadians who shop south of the border, and could help to slow inflation by making imports cheaper, a soaring dollar could also pull the rug out from under the country’s key export sector, leading to further job losses.

Another risk Carney needs to consider stems from the raging debate in Washington over what to do about the US$14.3-trillion worth of U.S. federal government debt, which was recently downgraded to a “negative” outlook for the first time by ratings agency Standard & Poor’s. “The U.S. is in a real dilemma,” says Alex Carrick, chief economist at Reed Construction Data Canada. “If the U.S. dollar starts to drop, and we’ve got this pressure of commodity prices, who knows where the Canadian loonie is going to end up.”

Could Canadians simply absorb inflationary price increases until the U.S. economy is back on firmer ground? Indeed, many consumers likely haven’t changed their behaviour in profound ways yet, just because the price of lettuce has gone up at the local supermarket. “I would suspect that economists key on it a lot more than your average person,” says Carrick. “The exception is gasoline, because people drive around and read giant signs that say $1.35 a litre.” But he stresses that inflation is a slippery slope. A little is considered the sign of a healthy, growing economy. But too much gets you into trouble quickly. Consider the 1970s, when North American central bankers were more keen on driving employment than controlling inflation, which eventually hit 12 per cent. The response in the 1980s was a hike in borrowing rates above 20 per cent. While Canada is unlikely to experience another bout of runaway inflation, many debt-addled Canadians would likely have trouble carrying their giant mortgages if rates went up even to a relatively modest eight or nine per cent. “Central bankers want to be pre-emptive,” Carrick says. “Because inflation leads to very bad things.”


 

High-price problems

  1. "Meanwhile, in Florida, a gang of thieves reportedly stole six tractor-trailers full of tomatoes in an apparent bid to cash in on soaring prices of fresh produce."

    Meanwhile, the gang that cratered the economy in the first place is still busily looting the last dregs out of the physical economy with nary a repercussion to themselves. I would say that the tomato thieves have merely finally caught on.

    Meanwhile: http://www.rollingstone.com/politics/news/the-rea