It's not time to fret about inflation ... yet
Evidence of calm will embolden Macklem and central bank to maintain stimulus
Inflation may still be a theoretical concern, but not a real one, as Canada's latest housing mania and surging commodity prices haven't dislodged expectations that the central bank will keep prices under control.
According to a Canadian Chamber of Commerce survey of 15,400 employers in January and February, only 14 per cent of companies planned to raise prices over the next three months, despite rampant anecdotal evidence of rising costs for inputs such as lumber, shipping containers and even pallets.
That aligns with Statistics Canada's latest inflation readings. The agency on Monday reported that its “adjusted” Consumer Price Index rose 1.5 per cent in February from a year earlier, faster than the official CPI, but still well below the Bank of Canada's target of two per cent.
“Overall, inflation has not become a bigger concern for Canadians, and the pandemic has not dramatically changed consumers' views on inflation,” the central bank said in its latest quarterly survey of consumer expectations, also published Monday.
That's an important conclusion. Inflation can be a self-fulfilling prophecy. If households and executives anticipate higher costs, they will demand higher prices for goods, services and labour.
The central bank would have to break that cycle by raising interest rates, even if it thought the economy still could benefit from further support.
Evidence of calm in the face of extraordinarily low interest rates and historic government spending levels will embolden Bank of Canada governor Tiff Macklem and his deputies to stick to their current plans, which could involve slowing the pace of bond purchases later this spring, but still maintaining plenty of stimulus for the foreseeable future.
“Inflation is always going to be something you can't ignore,” Chris Fowler, chief executive of Canadian Western Bank, said in a recent interview.
Bank of Canada's leaders “don't want to be in the position that we're in today, and have been for a number years with minimal inflation,” he said.
“Their stimulus, in some ways, was to stop deflation.”
The official numbers continue to reflect economic weakness. The CPI, which the Bank of Canada uses to guide its interest-rate setting, was 1.1 per cent in February.
That's near the low end of the central bank's comfort zone, which it defines as a range of one per cent to three per cent. The goal is to keep inflation somewhere in the middle.
However, the central bank and Statistics Canada realized early on in the pandemic that spending patterns had changed. They came up with a supplementary measure of the CPI that puts greater weight on the things being bought during the lockdowns, such as groceries and bigger houses in the suburbs, and less weight on things that were essentially off limits, like airline tickets.
The adjusted measure suggests inflation has indeed been running hotter than the official figure, but not so much that it would force policy-makers to do anything differently.
The adjusted CPI was unchanged from January, suggesting Macklem and his deputies won't be overly concerned about inflation when they revisit their interest-rate stance on April 21.
Still, the latest batch of data might give them reason to taper their weekly purchases of Government of Canada bonds, currently at about $4 billion per week, with newly created money.
The central bank's quarterly Business Outlook Survey suggests a higher degree of concern over inflation than the chamber's numbers. The Bank of Canada survey found that, overall, companies are feeling good about their prospects. (The poll was conducted before the latest round of restrictions took effect.) The sentiment indicator was the highest it's been since 2011 and almost 60 per cent of respondents said they intended to increase investment over the next 12 months.
A small majority of respondents said they expected input and output costs to rise over the next 12 months, an increase from the previous quarter. And 13 per cent of executives said they expected inflation to top three per cent, double the percentage who thought so in the previous survey.
The last time a similar percentage of execs felt that way was back in the first half of 2011, and inflation never developed into a serious threat.
For now, the Bank of Canada will probably be guided by consumer expectations for inflation to be about two per cent in a year and around three per cent in two years.
“While inflation pressures have perked up a bit, there's nothing to suggest that a more persistent increase is coming … yet,” said Benjamin Reitzes, a Bank of Montreal economist.