The fact that food prices continue to soar is no surprise to Canadians responsible for doing the grocery shopping. Really, all that Tuesday’s Statistics Canada data did was put a horrifying number on the increase.
But as they wait for the Bank of Canada to fix the problem of 10.8 per cent food inflation — the biggest rise in grocery bills since 1981 — Canadians may want to keep a close eye on Wednesday’s announcement from the U.S. Federal Reserve.
The Bank of Canada is officially charged with setting Canadian interest rates. And as the Canadian central bank’s deputy governor, Paul Beaudry, insisted Tuesday following the latest inflation numbers, it is still on the case.
“We want to have inflation down at two per cent,” Beaudry told a gathering of students and professors at the University of Waterloo, in southwestern Ontario, on Tuesday afternoon. “That’s where it was for a long time. Now it’s running way above.”
Beaudry saw some good news in the fact that Canadian inflation continued to decline from its highs. But the fact that price rises remain “broad based” — in other words, affecting a lot of goods beyond food and fuel — was one more danger sign that inflation expectations were stubbornly planted in the minds of Canadians.
He said it could reasonably take two years to dislodge that kind of inflationary thinking from the perceptions of businesses considering how much to raise prices and earners planning to boost their wage demands. Beaudry said the bank’s method included more large interest rate hikes, combined with a strategy of communications, to try to convince rational economic thinkers that inflation would come down.
Beaudry said he hoped “to get back to lower inflation with the least possible disruption on the real side of the economy,” but added that the Bank of Canada would do “whatever it takes.” That was read by Desjardins managing director and economist Royce Mendes as saying the bank would accept a recession if necessary to crush rising prices.
While Bank of Canada rate hikes have an effect on Canadians, what the U.S. central bank, known as the Fed, does is crucial to the lives of consumers, homeowners and investors north of the border as well.
According to some economists, what the Fed does may have a bigger impact on Canadians than interest rate changes by Beaudry and his team. Certainly anyone with a stock portfolio who watched markets plunge Tuesday on fears of rising U.S. interest rates would likely agree.
Marriage of inconvenience
The relationship between Canada’s central bank and the Fed is a bit like a forced marriage. A border that stretches nearly 9,000 kilometres, deeply integrated economies, close trade and banking relations, and currencies that rise and fall together mean that divorce is difficult to contemplate. And while it is not generally a troubled relationship, it is not always convenient — and definitely not a marriage of equality.
Prime Minister Justin Trudeau’s late dad, Pierre Elliott Trudeau, once compared living next to the United States to sleeping with an elephant.
“No matter how friendly and even tempered,” Trudeau père said in a speech to the U.S. National Press Club more than 50 years ago, “one is affected by every twitch and grunt.”
When it comes to monetary policy, the same thing still applies, Pedro Antunes, chief economist at the Conference Board of Canada, said Tuesday.
“If the U.S. gets gets into a hard landing scenario themselves, it’s hard, very hard for us to avoid that here in Canada,” he said.
Compared to the U.S., Tuesday’s figures indicate Canada’s inflation appears to be moderating. The most recent U.S. data showed that core inflation — a statistical measure that leaves out the most volatile prices for things like food and fuel — continued to rise. But as Antunes and many others observed, Canadian core was down on Tuesday.
Going it alone?
He said that is little comfort for poorer Canadians who spend a disproportionate share of their income on food, but some analysts suggested the Bank of Canada will not have to raise rates as high or as quickly as it had intended.
If so, Beaudry did not provide any reassurance to that effect. Economists know it is also very hard for Canada’s central bank to diverge too far from the Fed as it hikes interest rates.
Less that two weeks ago, the Bank of Canada’s senior deputy governor, Carolyn Rogers, suggested that a rising loonie, charged up by energy exports, would act as a pad against inflation in Canada. But since then, the Canadian currency has tumbled to its lowest level in two years. That makes imports, especially from our biggest trading partner — the elephant — more expensive, pushing Canadian inflation higher.
Even as Canadian domestic prices begin to fall, many internationally traded goods, including oil and animal feed, are priced in North American markets. A lot of our food comes from U.S. farms, but even products from outside the continent, such as grapes from Peru, are cleared through U.S. ports and priced in U.S. dollars for the U.S. market.
What you pay for your house is also at least partly ‘Made in America.’ While the rule of thumb is that short-term mortgages in Canada are pegged to the Bank of Canada overnight rate, longer-term interest rates are based on bond prices set in New York as lenders hedge against further rate increases.
And as mentioned, while some economists expressed optimism that the Bank of Canada could scale back interest rate increases, anyone with investments in the stock market or holding long-term bonds had little reason to be thrilled by that prospect.
U.S. and Canadian stocks and even cryptocurrencies declined sharply on Monday — bitcoin plunged below $19,000 US — on fears of what Jerome Powell, chair of the Federal Reserve, might do the following day.
Of course, as in any marriage, Canadians must accept the good with the bad.
Bank of Canada governor Tiff Macklem has said in the past that the only practical way to prevent inflation from repeatedly stealing buyer power from Canadian wage earners is to use rising interest rates to bring inflation under control. But that is hard when so many of the price increases we see arrive with global imports.
While Canada acting alone might not have a lot of clout on world prices, if the U.S. Federal Reserve decides to use all its might to clobber global inflation, Canadians may also benefit.