Slowing Inflation Doesn’t Mean You Get Your Purchasing Power Back

Investors in the financial markets were delighted when the latest inflation data appeared to show that the rise in prices in the United States had peaked.

While business journalists often imply that rising stock values ​​are a universal good omen, it’s not clear that many working Canadians, especially those who don’t have the money to invest in stocks and bonds, be prepared to breathe a sigh of relief.

As we await Canada’s inflation rate on Tuesday – also expected by economists to be down from its peak – there may be good reason to believe that even for market traders, the euphoria of the last week could be premature.

Irrational rebound?

Some financial commentators were calling last week’s stock jump a bearish rally and an irrational bounce.

And the Canadians I spoke to representing unions, universities and private sector companies all had strong reservations about the idea that lower inflation is a panacea that will make everyone feel good again.

A cooling real estate market, where many Canadians have invested their savings, shows little sign of reversing its latest downtrend.

The lingering effects of a decline in purchasing power may never be reversed.

And a drop in consumption due to falling wages and wealth is likely to hit Canadian businesses hard and could instead be a sign of further economic difficulties to come.

Traders working on the floor of the New York Stock Exchange were buoyed by the drop in the US inflation rate last week, sending markets higher. (Andrew Kelly/Reuters)

“Companies that have been able to increase [prices] and passing that higher cost on to consumers would benefit, at least in the short term,” said Gurupdesh Pandher, an economist and professor of finance at the Odette School of Business at the University of Windsor in Ontario.

Pandher understands why markets reacted positively to signs of falling inflation, as it could mean central banks may not need to raise interest rates as much or as quickly. But he fears last year’s price spike has already done damage.

The problem, he said, is that inflation is cumulative — like compound interest in reverse. A drop in the inflation rate does not recover your purchasing power.

Workers can never catch up

As an example, Pandher cites his own university’s employee salary contract, which he describes as a microcosm of the situation across the country. Signed last year, the contract provides for increases of 1% per year for three years, and a little more the fourth year.

Even when inflation rose within the central bank’s target range near 2%, a 1% increase would mean real wages – where the real means after accounting for inflation – were actually slowly decreasingso that the purchasing power of employees continues to decline.

But with Canadian inflation around 8%, the decline is much more pronounced. this means that the real wages of these employees have fallen by 7% this year alone. Pandher said that even if the inflation rate started to slow, at the end of the contract period, employees “could be 14, 15% below the inflation rate and they would never catch up.”

And while that’s bad for workers because they effectively get poorer, it’s also bad for business since total spending in the economy also goes down.

A grocery cart containing various food items.
Many grocery stores have been able to pass on higher prices to customers, but as overall spending begins to decline, some retailers will suffer. (Ivanoh Demers/CBC/Radio-Canada)

“Keep in mind that if wages don’t rise enough, consumers will have less money to buy in the future, so it’s going to come back and bite those businesses as well,” Pandher said.

Inflation can sneak up on you. While many workers who have little experience with high inflation may not have realized that what seemed like a pay rise was actually a drop in real pay after inflation, Bea Bruske said, President of the Canadian Labor Congress (CLC).

And now they’re on a crash course.

“They don’t have time to think about economic theories,” Bruske said on the phone from Las Vegas where she was speaking at the Steelworkers Convention, where inflation was clearly causing severe pain. “But they can feel the pinch in their wallet.”

Labor movement revitalized

Bruske, who immigrated to Manitoba as a child, was elected president of the CLC last year when inflation had just soared above 3%. Since then, she says, the loss of purchasing power of workers while some employers are hoarding the profits helped revitalize the North American labor movement which has not been as strong as it should have been in recent years. The pain of their members’ real wage collapse came as a wake-up call.

“I absolutely believe it,” Bruske said. “I think many, if not all, unions are doing some soul-searching.”

She said unions are not only increasingly engaging and mobilizing their own members, but are “organizing outwards” to increase union membership in sectors that until recently have not. maybe didn’t see the need.

But when asked whether this will lead to an increase in economically disruptive industrial action, Bruske indirectly answered the question.

“I think we are in for many more strike votes,” she said.

Karl Schamotta, chief market strategist at US payments company Corpay, is skeptical that Canadian unions still have the power to drive up wages and trigger a new wage price spiral. Nonetheless, he said labor market tensions have shifted bargaining power to workers.

Like Pandher, he’s not convinced that signs of falling inflation mean the economy can escape a slowdown – even if a labor shortage means the labor market won’t suffer. as much as in the past.

WATCH | There are signs that inflation may be falling in Canada:

Inflation shows signs of slowing as prices of some commodities fall

There is cautious optimism that inflation in Canada may have peaked as price growth for things like oil, lumber and real estate begins to decline.

“In other words, we’re likely to see employers trying to retain their workers longer than they have in previous economic crises,” he said.

Don’t look down

Schamotta said it’s clear wages have lagged and business leaders know it will be difficult to keep raising prices even if their costs, including the cost of labor, continue to rise. . He agrees that spending will continue to fall, not just from falling real wages, but from falling assets, including most people’s greatest asset: their home.

“Specifically, we envision a significant and prolonged decline in home prices across Canada, particularly in major cities, which will impact how affluent consumers feel,” he said.

Two homes for sale near the outskirts of town in Carlyle, Sask. For most Canadians, their home is their greatest asset and falling prices are making them feel poorer. (Don Pittis/CBC)

Like the cartoon Coyote that fled off a cliff, he said, Canadian consumption has already begun to slump, but the consumers and businesses that depend on it have not yet looked down. and didn’t realize it.

Canada’s chief central banker, Tiff Macklem, has repeatedly said that the only way to keep workers’ wages from falling further is to get inflation under control quickly with high interest rates, even at the cost of destabilizing the market for Canadian homes.

Despite market optimism that signs of success in fighting inflation mean interest rate hikes will slow, Schamotta said that until inflation is truly under control, central banks could be reluctant to send this message.

Instead, he said, in future monetary policy statements, they might decide to deliberately “pour cold water on the idea that monetary conditions are going to ease anytime soon.”

Follow Don on Twitter @don_pittis

Leave a Comment

Your email address will not be published.