Goods price inflation was about 4.5 per cent by the middle of 2021.Over the last two years, the world has had to battle the ramifications of a global pandemic. Adjustments to new change have had to be made, and yet while things have been moving in a relatively positive direction, there are still things to be concerned about.
“The demand for goods and services at home is running ahead of the economy’s ability to supply them,” reports Tiff Macklem, governor of the Bank of Canada, as part of a speech to the Halifax Chamber of Commerce on Oct. 6. “Businesses are having a hard time finding enough workers. And what started as higher prices and delays for many internationally produced goods has broadened to many services.”
This makes it difficult for the contractor when large increases to the cost of labour and equipment occur between winning the bid and actually starting the project, “Some builders are notorious for putting out bids early, just to get a better price, and that bid for the project may not start for two years,” explains Joe Pagliuca, co-owner and president of DMG Mechanical Inc. “Now in between the time of winning the bid and the start of the project, prices for labour and equipment can increase, which you need to account for in your bids.”
The good news for Canada is that inflation peaked at 8.1 per cent in June and has been on the decline for two months. “That’s welcome news, but inflation will not fade away by itself. To get back to more normal levels, we need to slow spending in the economy so supply can catch up with demand. This will help relieve price pressures here in Canada.” In Sept, there was an increase in interest rates for the fifth consecutive time since March, “We indicated that interest rates will likely need to go higher still to bring inflation down to the two per cent target,” explains Macklem.
Where we are headed
“Historical experience has taught us that sup-ply disturbances typically have a temporary effect on inflation, so we tend to look through them. A year ago, we expected production to ramp up and investment in global supply chain logistics to pick up. In hindsight, that turned out to be overly optimistic,” explained Macklem.
As previously stated, inflation in Canada has been on a downward trajectory. Currently, it sits at seven per cent. “These signs of improving global supply chains are encouraging, but we can’t count on easing pressure on global prices to lower inflation in Canada,” said Macklem. “At a minimum, improving global factors will take time to filter through to Canadian inflation. And the recent depreciation of the Canadian dollar in the face of US-dollar strength will offset some of this global improvement by making US goods and vacations more expensive for Canadians.”
According to Carolyn Rogers, senior deputy governor at the Bank of Canada, inflation won’t come down overnight. “Given the lag between changes to interest rates and their impact on inflation—and the considerable uncertainty surrounding the outlook—getting inflation all the way back to two per cent will take some time. We also know there could be bumps along the way.” She said this during a speech to the Calgary Economic Development on Sept. 8. “We have a careful eye on many different things—we have a lot of work ahead of us, and we will not rest easy until we can get inflation back to target,” said Rogers.
Spiralling upwards
“The longer high inflation persists and the more pervasive it becomes, the greater the risk that high inflation becomes entrenched. In particular, if high inflation pushes wages up and higher labour costs then push inflation up further, inflation expectations can become unmoored and high inflation can become self-fulfilling. We can’t let that happen because if it does, it will be much more costly to return inflation to target,” explains Macklem.
If a wage-price spiral occurs, “The spiral prompts inflation expectations, wages, and prices to ratchet upward. With de-anchored expectations, inflation stays higher than it would have been with easing demand and flat or declining commodity prices. To break the vicious circle, monetary policy works to re-anchor long-term inflation expectations to the two per cent target. This is done by setting monetary policy much tighter than in the base case and creating additional excess supply.”
The end goal will be to have an economy where no one has to guess where inflation is headed. Although it can probably be expected that there will be more interest rates in our future, “Labour markets remain tight, the economy is in excess demand, and we have yet to see clear evidence that underlying inflation has come down. When combined with still elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted,” stated Macklem. “Simply put, there is more to be done. We will need additional information before we consider moving to a more finely balanced decision-by-decision approach.”