Finance

Postmortem: Macklem goes direct to consumer

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Financial Post columnist Kevin Carmichael, editor of the FP Economy newsletter, unpacks the week in economics.

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Cooling breeze

The inflation boogeyman suddenly looks a little less scary. Statistics Canada reported on July 28 that the consumer price index (CPI) increased 3.1 per cent in June from a year earlier, faster than the Bank of Canada would like under normal circumstances, but much more manageable than the 3.6-per-cent pace that statisticians clocked in May.

June probably is a truer representation of the trend. The May reading was exaggerated by the way inflation is conventionally expressed. Economists tend to benchmark Statistics Canada’s latest monthly update of its CPI basket with the index’s level a year earlier. Prices were contracting in the spring of 2020, so year-over-year comparisons in 2021 were always going to be distorted. By June of last year, the economy was starting to recover, so “base-year effects” will start to fade.

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The pandemic will continue to influence price dynamics in other ways. The cost of buying a car put upward pressure on inflation in June, as a shortage of computer chips has slowed production, creating an imbalance between supply and demand. That sort of thing is happening across the economy, and nowhere more so than in housing, where demand has received a nitrous shot from historically low interest rates and supply was already chronically constrained. Higher prices put upward pressure on inflation (as measured by the CPI) by raising the hypothetical cost of moving house.

But the story isn’t quite as simple as that. The chart below is a version of one that Bank of Montreal chief economist Douglas Porter circulated last week. It shows that low interest rates have offset higher prices almost perfectly. There is downward pressure on inflation, too.  

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Direct to consumer messaging

Bank of Canada Governor Tiff Macklem told his counterparts at the annual Jackson Hole conference last summer that central banks had been doing a poor job of connecting with the public and that he intended to rely less on economists and journalists to interpret the Bank of Canada’s thinking for the masses. Macklem has been giving a lot of interviews since taking over as governor 13 months ago, but on July 29, he decided to ensure that his message was delivered to the reading public unfiltered by writing a commentary on inflation that was published on the front page of the Financial Post.

Macklem reiterated the Bank of Canada’s view that the current burst of inflation is probably temporary and should calm down as soon as suppliers catch up with the pent-up demand created by a year of lockdowns. To be sure, that could take some time. The central bank’s latest forecast sees annual increases in the CPI averaging 3.9 per cent in the third quarter, a pace that will test the nerve of a public that has been conditioned to expect inflation to trundle along at an annual rate of about two per cent.

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That’s probably why Macklem chose to write an op-ed now. He will be feeling pressure to shore up confidence in the Bank of Canada’s ability as an economic manager to reduce the risk of a mass freak-out if prices start to look like they’ve come untethered. The governor got a little help from the data. Statistics Canada reported on July 30 that industrial prices leveled off in June, even as raw material costs continued to rise, suggesting that producers are choosing to absorb some of the inflation rather than risk sales by shifting the burden of those costs to their customers.

An inflationary spiral would require a surge in wages. While there’s some anecdotal evidence that labour shortages in various industries is forcing employers to offer more pay to get the people they need, harder data remains unreliable. That’s because most of the persistent unemployment occurred in relatively low-income occupations such as bar tending. With those types of workers removed from the (smaller) labour pool, average wages are higher, making historical comparisons difficult.

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Statistics Canada published its May payroll survey on July 29. The numbers tend to be overlooked because they lag the Labour Force Survey by a couple of months, but they are often more reliable because they come directly from employers. The chart below uses those data to attempt to correct for some of the noise created by the pandemic. Rather than a year-over-year comparison, it shows the monthly change in average weekly wages over two years for a group of industries that was mostly unaffected by the recession, either because they were deemed essential or employees could easily work from home. There’s some wage pressure in those sectors, but not a lot. It’s still early days, but Macklem’s inflation story is off to a good start.

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Summer surge

Statistics Canada reported on July 30 that gross domestic product dropped in May, a predictable outcome given much of the service-side of the economy was ordered shut to keep shoppers, diners, and travellers from making the third wave of COVID-19 infections worse than it already was.

But Statistics Canada had some good news mixed with the bad. The agency also released its best guess of what happened in June based on the information that it’s been able to gather to date. GDP appears to have surged about 0.7 per cent from May, which suggests the economy grew at an annual rate of about 2.5 per cent in the second quarter. It also heralds a strong summer, as a vaccinated population rushes to enjoy the things from which it has been deprived for the better part of a year.

• Email: [email protected] | Twitter: carmichaelkevin

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