In this article, you will get all information regarding Inflation is cooling but prices aren’t going to fall. Here’s why – ChroniclesLive
The pace of inflation is cooling. The annual rate came in at seven per cent in August, Statistics Canada reported this week. That’s down from the four-decade high we saw in June.
But that doesn’t mean prices are coming down. Even the most optimistic scenarios forecast prices will continue to climb even as inflation comes back under control. “It’s more that price increases will be slower rather than prices will be falling,” says BMO’s senior economist Benjamin Reitzes.
The best case scenario is that higher interest rates, and a cooling economy, will lower inflation to a more moderate pace. Right now, overall inflation is slowing — but it’s mostly being dragged down by a lower global price of oil.
Reitzes says consumers shouldn’t expect that to happen with other goods and services.
“Some prices will probably pull back, like we’ve seen gasoline prices come down,” he says. “But others are just at a new higher plateau and they’ll just be rising at a slower pace and that’s what slower inflation is.”
More interest rate hikes expected
As higher interest rates increase borrowing costs and bite into economic growth, some of the biggest and earliest drivers of inflation are coming back down to earth. Oil has fallen precipitously this year, the cost of shipping is almost back to where it was pre-pandemic and the price of key grains and corn have fallen as well.
But the cost of food and services is still pushing higher. Food prices rose 9.8 per cent in the year up to August. The fight to get prices down will rage on. Economists expect the Bank of Canada will push ahead with its plan to hike interest rates even further.
“Inflation likely hasn’t slowed far enough, or for long enough, to convince the Bank of Canada that further interest rate hikes aren’t necessary,” wrote CIBC economist Andrew Grantham.
That means Canadians already pinched by higher prices will be further squeezed by increased debt payments. The economy will slow and jobs will be lost.
Pedro Antunes, chief economist at the Conference Board of Canada, says we haven’t had this kind of inflationary surge in decades, so people forget just how insidious it can be.
He says inflation devours our purchasing power. Sure, the cost of just about everything is surging. But wages aren’t keeping up. In fact, wages are falling when you factor in increased costs. “Real wages” are calculated by subtracting wage growth from inflation.
Antunes says that the gap between wage gains and price growth is now baked into the economy. “We’re going to see this kind of being a tenacious hit to our ability to buy goods and services.”
And even though price growth is slowing, it will take a long time to get costs back into the window the Bank of Canada has deemed acceptable.
The central bank would like inflation to grow between one and three per cent each year. Claire Fan, an economist with RBC, says how quickly inflation can get back into that window depends on how aggressively the Bank of Canada boosts interest rates.
Fan says her forecasts show inflation won’t get back into that window until the end of next year.
“That’s what we are hoping for,” she says. “But that is contingent on the Bank of Canada to hike rates to four per cent by December.”
But she says Canadians need to remember, slowing inflation will not mean a return to where prices were before all this started.
“To see a deceleration in the rate of price growth is what we’re all expecting, not an outright decline in prices,” she says.
After all, the alternative to rising prices is much worse.
Dangers of deflation
An actual decline in prices would set off a whole new crisis for the economy.
Deflation happens when prices fall across the board and the numbers in the Consumer Price Index, a basket of goods and services, turn negative. Suddenly people stop buying things, the economy contracts and jobs are lost.
“It puts a lot of pressure on the economy, it also makes it extremely difficult for central banks to stimulate the economy when you’re in a deflationary environment,” says Reitzes.
It’s also a cycle that is notoriously hard to break.
“Just look at Japan,” he says.
Japan has been struggling with deflation for decades. Various governments and different central bankers have tried just about everything to get out of it.
“They’ve been doing their best to get out of it. Whatever they can do, they’ve done, the government spent a lot of money and the central bank has expanded their balance sheet,” says Reitzes.
It’s been a generation since Canadians were faced with these sorts of questions. Across the country, people are struggling under the weight of rising prices. The cure is higher interest rates, which leaves indebted households even more squeezed.
Price growth is slowing. But the surge of this past year has set a new normal. A new level from which, if we’re lucky, prices will continue to rise from — just at a more manageable rate.
Inflation is cooling but prices aren’t going to fall. Here’s why – ChroniclesLive
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