These economic ‘wildcards’ might keep inflation higher for longer – National | Globalnews.ca

over a period of six weeks, as part of Out of pocket seriesGlobal News investigates how inflation is affecting Canadians from coast to coast.

Canadians Are Feeling Their Dollar Is Spread Amidst High inflation And the rapid rise in borrowing costs has probably been asking the same question for months: When will it end?

After a year when prices at the gas pump exceeded $2 a liter in parts of Canada and grocery bills soared as inflation hit a high not seen in 41 years, economists are somewhat more optimistic in their forecasts for 2023. Looks like

Armin Yalnizyan, economist and fellow at the Atkinson Foundation, says inflation has been on a “downward slope” for months now.

According to Statistics Canada, annual inflation for this cycle peaked at 8.1 per cent in June of last year, up from December’s reading of 6.3 per cent.

Bank of Canada, which acted the fastest Rate of interest The growth cycle in its history last year to ease price pressures, said in January that it expects headline inflation to reach the outer limit of its one-to-three percent target by mid-2023 — a quarter of last year’s increase. faster than estimated.

However, it is too early to say that inflation has been brought under control. The central bank noted in its own forecast that there were caveats to the outlook, with many price pressures remaining strong or the potential for sudden swings.

Some items in Canadians’ baskets have maintained their strong price momentum; food inflationNotably, the most recent reading has remained above 10 percent.

While prices at the pump have eased substantially from last summer’s highs, the Bank of Canada signaled that the energy market is particularly volatile and could play havoc with its outlook.

Yalnizyan says, and still strong demand for services, a tight labor market and other “wildcards in the mix” are blurring the inflation horizon.

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“I have never in my life seen such a range of opinion on what is going to lead to inflation,” she tells Global News.

“There is absolutely no consensus on what the future holds. Never have things been more uncertain.

Here’s what you need to know about where inflation is today and where prices could be headed in your lifetime.

Yalnizyan points out that the inflation experienced by Canada and much of the world through 2022 was unlike anything the global economy had seen since the 1970s and ’80s.

She says that rampant inflation was born out of a particularly powerful combination: increased demand after many COVID-19 Pandemic restrictions lifted, global supply chains plunging, and Russia’s invasion hit unexpectedly ukraineto name a few.

These supply shocks made it harder for Canadians to buy new cars, appliances and other electronics and were also behind much of the rise in commodity prices, including oil and gas, last summer.

“We did not go through a regular phase of inflation. We’ve gone through an inflation the likes of which we haven’t seen in four decades because of a pandemic and then a war,” Yalnizyan says.

Since then, however, global supply chains have largely adapted to the new reality, although the effects of COVID-19 remain and the Russian war is still on.

Dominique Lapointe, global macro strategist at Manulife, says consumers should see “some recovery” in the prices of many goods that were affected by constraints last year.

“Other goods that were supply-constrained, such as cars or furniture, electronics, those prices have also come down significantly in the past few months,” he says.

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But Yalnizyan says that even as these sides of the supply chain show improvements, new disruptions are adding to inflationary pressures.

She says prices at the grocery store are being affected by agricultural diseases, droughts and other severe weather around the world. She says the sudden lifting of COVID-19 restrictions in China late last year has led to a flood of fresh demand for the fuel and critical minerals.

“We have a lot of constraints that can really keep prices above the target of one to three percent, which is something the central bank can’t affect.”

Despite some progress on the goods side of inflation, economists who spoke to Global News say more work remains to be done when it comes to price pressures on services.

“Prices at restaurants, prices to get on an airplane, prices for travel, personal care services. Those prices are more tied to the labor market and the fact that we’re missing out on a lot of the people who work in these industries now.” It feeds into the fact that prices are not going to come down that quickly,” Lapointe says.

Canada’s labor force was constrained by the rush of people eager to return to face-to-face services after COVID-19 restrictions are lifted. For example, it raised the prices of travel and hospitality, and made eating out more expensive.

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Canada’s tight labor market – the country added Strong 150,000 jobs in January As the unemployment rate remains above record lows – it also means that many Canadians have not yet been discouraged from spending, given their stable incomes.

Demand for services is showing early signs of easing, LaPoint notes, as Canadians rein in some of their spending in response to higher interest rates and fears that the recession may not go away. But it hasn’t even been a year since rates started rising, he notes, and it will still be months before the effects of these higher rates fully ripple through the economy.

For example, as more Canadian homeowners come up to renew their mortgages, they will be forced to renew at higher rates, eating up more of their household budget and removing some of the spending demand that fuels inflation.

“It takes time for these elements to really have an impact on the economy,” he says.

According to Bank of Canada Governor Tiff McCallum, services inflation is a major part of the labor market “uncertainty”. He said in a speech last week That higher labor costs would be one of the reasons why inflation may take longer to come down.

“It’s very difficult to see the prices of goods coming down, the prices of services coming down because we don’t have enough people to provide those services,” Yalnizyan says.

Concordia University economics professor Moshe Lander says that, to date, wage increases are not driving inflation.

“The inflation that we have seen in the last 12 to 18 months has not come from rising wages. It came from almost everything but rising wages,” he says.

Canadian wages are struggling to keep up with the rising costs of shelter, fresh food and other basic necessities.

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McCallum acknowledged in his speech last week that the risk is “shrinking” that Canada will see a wage-price spiral, in which workers bid up wages to keep pace with inflation and businesses raise prices in response, leading to Inflation is on the rise.

While average hourly wages in Canada rose 4.5 per cent last month – a slight respite from the pace set for late 2022 – Lander says the central bank is still looking to bring down that figure before declaring victory in the inflation battle. Will remain

For inflation to really calm down and return to the central bank’s two percent target, businesses need to lower their prices or slow down the pace of growth.

With global shipping costs returning to pre-pandemic levels, many businesses are looking to reduce these input costs. But what will encourage them to finally lower their prices, especially as Canadians become accustomed to paying more?

Yalnizyan says that comes from Canadians deciding they won’t pay the price and either give up the purchase or find a cheaper option elsewhere – competition driving costs. She says that if Canadians begin to feel a cut in their income, potentially resulting in job losses, they will be more inclined to engage in bargain-hunting behavior.

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Lander notes that just because global commodity prices may be low, it doesn’t mean businesses can immediately shift the focus of their pricing decisions. Contracts with suppliers and contractors are set for months or years at a time, he says, and come up for renewal at regular intervals in the same way that a homeowner’s mortgage does.

Lander points out that along with those lower costs, it takes too long for consumers to pass on the higher costs to reconsider wages with employees.

“It’s really difficult to do that through the supply chain, through your labor, through your capital owners, through your land owners. And so, it takes a lot longer for that to happen.”

The economic downturn the Bank of Canada is trying to avoid may be nigh – the central bank’s policymakers indicated last month that they were prepared to hold off on raising rates if inflation persists, according to forecasts Will be

But the Canadian economy continues its strong output. The job market has not yet shown the crack many economists were expecting. And interest rates have not yet meaningfully affected many Canadians who are sensitive to the sharp increases from last year.

“The economy continues to defy expectations,” says Lander.

While some economists predicted that Canada would enter a recession as early as 2023, stronger-than-expected economic data has prompted some forecasters to scale back their calls for a recession. For example, the Bank of Montreal moved its outlook for a recession to the second quarter of 2023, a full quarter later than expected.

But while the economy has fared better than most expected early in the year, Lapointe says Canada and the rest of the world will not be immune to coordinated rate hikes from several central banks globally. Eventually, these steps will lead to a reduction in economic activity and inflation, he says.

“The economy is more resilient than we thought,” Lapointe says.

“We thought that maybe the fact that interest rates are so high now would slow the global economy down drastically. But that takes a while, and we expect that recession is still coming.”

– With files from Global News’ Anne Gaviola