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Canada at Risk of Wage-Price Spiral

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  • Rising inflation expectations in Canada could become fuel for consumers and businesses that would spark off a wage-price spiral.  
  • Stagflation risks are increasing in Canada especially as the prices of key commodity exports come off their most recent highs. 

The Bank of Canada’s quarterly survey of executives and consumers suggest expectations of inflation are likely to be persistent as Canada experiences tight labor markets and companies continue to be battered by increasing input overheads.

With Canadian businesses struggling to fill demand, there is growing pressure on the Bank of Canada’s Governor Tiff Macklem to swiftly withdraw stimulus from the economy.

Speaking with Bloomberg, Assistant Chief Economist at the Royal Bank of Canada Nathan Janzen suggests the Bank of Canada is worried expectations of long-term inflation could become unstable and in order to prevent such an outcome, raising rates from their current low levels is “an easy call to make”.

Consumer expectations of price increments soared to record highs, with households observing inflation levels at 6.8% in one year and 5% in two years, the highest forecasts in decades.  

Anticipated increases in the cost of living are key indicators of actual inflation where businesses elevate prices and staff fixate on salary raises in expectations of higher prices, with the potential to fuel a wage-price spiral.  

According to the Bank of Canada, there are growing concerns that consumer expenditure may be beaten down by higher inflation, and lower consumer confidence could be compounded by wages not meeting the rising cost of living.

The prospect of course is that expectations become reality and Canada tumbles into stagflation, with low growth and high inflation tanking the economy.

A recent slump in commodity prices has also hit Canada, with rising expectations of a global recession pulling down major agricultural and industrial commodity prices down from their recent highs. 

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