On July 13, the Bank of Canada raised its key rate by 100 basis points, a first in nearly a quarter of a century. A few days later, Statistics Canada informed us that the inflation rate for June reached 8.1% on an annual basis, again a record, for more than 40 years this time.
Posted at 11:00 a.m.
Many commentators did not fail to underline, with emotion, that this was a catastrophic situation. And not just among commentators: the Governor of the Bank of Canada, Tiff Macklem, was gloomily worried about the presence of an inflationary spiral, with workers demanding better wages in the face of rising consumer prices. These wage increases increase the costs of businesses, which pass them on to consumers, who demand more wage increases, and so on.
Faced with these outcry, some perspective seems necessary to me.
Although the increase in the key rate is a record for almost 25 years, the rates nevertheless remain historically very low: during this last increase of 100 points, the key rate was at 5.75%, i.e. more than double of what it is now.
The rates paid by consumers, particularly mortgages, are also historically very low (we are far from 22% for a five-year mortgage in the early 1980s). Admittedly, this will calm the ardor of many households wishing to acquire a property, but the problem is elsewhere, and it is that of the dizzying increase in the value of buildings, which an increase in rates will not solve. short term.
If we use Mr. Macklem’s logic, it is expected that the rise in wages will exceed that of consumer prices. Workers seek to maintain their purchasing power, if not to increase it. Where an inflationary spiral is to be feared is when the increase in wages is much higher than that of consumer prices. However, this is not the case, it is even the reverse. The average salary between May 2021 and May 2022 in Canada increased by 2.6 percentage points less than inflation in June; Canadian households therefore suffered a loss of purchasing power of 2.6% in one year. We are very far from the inflationary spiral.
Finally, consumer inflation in June is mainly due to the rise in gas and food prices. Similarly, the rise in industrial prices is also mainly caused by energy, food raw materials and mineral resources. These increases are caused, almost entirely, by global phenomena that almost completely escape the attempts to control and influence Canadian institutions.
The current restrictive monetary policy will do almost nothing to change this inflationary surge and will only hit over-indebted households by increasing their mortgage and consumer credit payments, without curbing the rise in the price of their consumption basket.
Moreover, keep in mind that these data are for June. Since the beginning of July, we have seen a marked drop in the price of gasoline in the United States and Canada, and on the world markets, a drop in the price of oil and, above all, of metals and minerals. There remains that of food which does not seem to give us any respite, particularly with the extreme weather events coupled with the conflict in Ukraine. Although no one can predict the future (especially in a turbulent period as we know it), it’s a safe bet that the worst is behind us and that the global and North American economy is in a period of consolidation. . This has also made the US Secretary of the Treasury, Janet Yellen, say that the North American economy could avoid a recession.
That’s wiser than brandishing scarecrows. The facts are stubborn and must be put into historical perspective, without denying the marked effects of the current situation for many households.