GST Cut Spurs the Inflation Dragon: What Will the Bank of Canada Do?
The Canadian dollar finished at 88.88 cents US today, down from its lofty level over 91 cents last June 13th. For Canadians weary of a dollar looking toward 95 cents, 88 cents almost seems like we’re back down to 65 again.
It’s funny what we become used to. This past weekend I welcomed a good friend, Dr. Oswald Zachariah, or as his old Guelph mates like to call him Dr.”SuperZach.” Oswald headlined “Sunday Evenings in the Park” this past Sunday, a Christian concert put on each Sunday evening in Dresden Ontario. Oswald is one of my economist buddies. However, it was his family, which is a showcase for the Canadian economy.
Oswald is a senior policy analyst with the Ontario Ministry of Agriculture, Food and Rural Affairs in Guelph. His wife works as a teacher. His daughter is in University but she is working at a summer job. His nephew has a job with “Better Beef”, a slaughtering plant owned by Cargill in the Guelph area. Guelph is exploding with growth, my friend and his family is the beneficiary of a local economy dominated by jobs, jobs, jobs.
Sometimes here in Chatham-Kent we tend to forget that. People continue to leave here. When they leave the economic activity leaves too. We don’t have an economy dominated by “jobs, jobs, jobs” like our friends up the road in Guelph. Someday I hope. Chatham-Kent is a jewel just waiting to be tapped.
In the meantime the Canadian economy continues to hum. However there was a bit of a hiccup in the June jobs number. Statistics Canada released a report that said the Canadian economy lost 4600 jobs in June. Many of my economist colleagues were looking for the economy to gain 10,000 jobs in June.
So maybe things are not as rosy as I once said. But before we jump to conclusions take a look at our unemployment rate. Even with those jobs gone we are still at the sizzling low unemployment rate of 6.1%. With Alberta leading the way, Canadians are still working almost at capacity. Finding a crack in this economy is still pretty hard to do.
So what does our old friend David Dodge do? The expectations are he’ll hold the line and not raise interest rates on Tuesday. This is one of the reasons the dollar went down to 88.88 cents US. However, core inflation, which excludes many volatile components like food and energy, recorded its strongest yearly increase since December 2003. It has increased to 2% recently from 1.5% in April.
You know what that means if you are a regular reader of this column. The interest rate hammer is one of Dodge’s favourite tools to fight inflation. He’s raised it seven times since last fall. He certainly will be tempted if not this time, to push those rates higher next time. Nobody wants an inflationary spiral to get out of control. Remember, 10 days ago the Canadian economy got a $5 billion stimulus.
What you say? Think of it this way. Almost every morning I go to the local Tim’s and get a coffee for the love of my life. On July 1st that coffee cost a penny less. Yep, we had a 1% GST cut and most of you hardly noticed. However, across Canada those pennies add up. We’ve suddenly have consumers deciding what’s going to be done with $5 billion instead of the government.
We will save it, invest it or spend it. That’s surely what the retailers of Canada are hoping we do. Clearly though a $5 billion dollar stimulus is what it is. By its very nature it is inflationary. David Dodge might pass this month, but with that much money sifting through the cash registers of Canada I can see him raising interest rates in our future.
While this is going on check the price at the pump. Chatham-Kent gas prices still flutter above $1/litre. Oil prices are moving within a $74/$75 range. Do we see $80 comes September? Or am I being too conservative and is $90 more like it? It’s hard to say but that reality will surely make the spectre of inflation very real on the Canadian horizon.
All of these “potential” economic problems will hardly ripple in places like Alberta and the Great Toronto Area where money is easy and jobs are plentiful. It is the economic hinterland like here in Chatham-Kent, which will be affected most. The challenge for those of us here is to stop the economic bleeding of out-migration. At the end of the day, regardless of what David Dodge and the inflationary dragon do, that is our greatest economic challenge.