Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud. The following commentary is a summary of a recent opinion piece by Charles St-Arnaud in The Globe and Mail (here).
In the piece, St-Arnaud explains why high wage growth means the Bank of Canada is likely to remain worried by inflation despite the recent easing in CPI. In an environment where businesses are making more frequent and bigger price adjustments, higher wages will likely be passed to consumers more rapidly, eroding their purchasing power and leading them to ask for further wage increases. It’s this inflationary cycle the BoC is concerned about and that the central bank is hoping to avoid. It may not necessarily lead to higher inflation, but it will make inflation stickier and harder to return to target.
However, the risk of overtightening is real. With monetary policy in restrictive territory, after a 475-basis-point increase in the policy rate, with its full impact likely to only be felt in 2024, and rising insolvencies, an increasing number of households are struggling financially. The risk to the economy is significant job losses from a weakened labour market. Given high household indebtedness, the resulting impact on household income and their capacity to service this debt could lead to a hard landing for the Canadian economy and a deep recession.
Nevertheless, the continued wage growth and persistent inflation leave the central bank with a significant dilemma. Should it prioritize returning inflation to its target, its official mandate, at the cost of rising hard-landing probability and financial stability risks, or should it be more cautious in its approach, at the risk of persistently elevated inflation, requiring a more robust intervention later?
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