Is inflation under control in Canada
2023.01.15 11:21
Is inflation under control in Canada
By Kristina Sobol
Budrigannews.com – Economists believe that as Canadian inflation slows, the price of necessities like food and rent can indicate whether it will sustainably return to the Bank of Canada’s 2% target. These items are important predictors of inflation expectations.
The headline inflation rate in Canada is expected to fall to 6.3% from 6.8% in November in the consumer price index report that is due on Tuesday. This is the lowest annual rate since February.
Although this is encouraging news for the economy, experts anticipate that energy costs will account for the majority of the slowdown and that the annual rate of underlying inflation will not significantly rise.
They place an emphasis not only on the extent of price increases but also on more recent, three-month rates of core inflation and essential consumer-facing CPI basket items.
Food, rent, and gas price increases, which have already slowed, are very obvious, so they tend to have a big effect on inflation expectations.
In a tight labor market, wage demands could rise if inflation expectations rise, putting additional pressure on prices.
“Central banks are moving toward the idea that, yes, inflation will fall – we know that – but will that be sustained even if it falls to less than 2%?” said Capital Economics senior Canada economist Stephen Brown.
“One eye is on wage growth, which is strong but not bad at the moment; the other idea is on price inflation for essentials, which could keep wage demands high because it affects inflation expectations.”
One of the BoC’s preferred measures of core inflation, CPI-trim, is expected to rise by 5.3% annually in December, matching November’s pace, according to Brown.
By raising its benchmark interest rate by a record 400 basis points in nine months to 4.25 percent, the Bank of Canada has pledged to bring inflation back within its target range. At the interest rate decision on January 25, money markets estimate that there is a 70% chance that it will increase by an additional quarter point.
In November, food prices increased 10.3% year-over-year, shelter prices increased 7.2%, and the December labor force survey revealed a 5.1% increase in average hourly wages.
“Wages become more of a tailwind for inflation in the future if inflation slows and wage growth does not.” According to Royal Bank of Canada assistant chief economist Nathan Janzen, “that’s what central banks are more worried about right now.”
Economists, on the other hand, are hopeful that a wage-price spiral—a prolonged cycle of higher prices and wages—cannot be avoided.
“Whether that is a concern for the longer term, 2024 and beyond, I think is a different question,” Brown stated. “High inflation is having some impact on wages at the moment.”
“We really need to see weaker price growth across the board in December.”
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