As inflation, oil prices continue to rise, is Canada’s stagflation next?


News analysis

Inflation has proven to be a more annoying problem than central banks once thought. With soaring energy prices, the more awkward economic outlook for stagflation, reminiscent of the 1970s, is being debated in financial markets. However, analysts say the risk is minimal.

Stagflation is generally considered inflation beyond the central bank’s target range while the economy is slowing or shrinking. This is an economic stagnation due to rising inflation.

Stagflation confuses central banks, as raising interest rates to combat inflation only further weakens economic growth. For households, stagflation increases all costs, but higher unemployment reduces income.

At the beginning of the year Google search “Inflation” reached record highs in Canada, the United States and the United KingdomStagflationIs on the rise.

Deutsche Bank’s October 2021 survey of more than 600 market experts around the world found that some sort of stagflation (three versions were envisioned) could occur in the next 12 months. There is a consensus that it is highly sexual.

Nonetheless, Jim Reed, head of Deutsche Bank’s thematic research, said he believes the term “stagflation” is being used “too aggressively at this time.”

BMO Senior Economist Sarguatieri told the Epoch Times that the risk of stagflation is limited due to strong demand fundamentals in the Canadian economy. He points out that households are sitting in excess savings, wealth from rising stock markets and housing is still high, interest rates are very low, and the government is spending.

“It will also require some sort of unfavorable demand shock. It could lead to weaker economic growth and higher unemployment contractions, such as stock market revisions and demand-hit housing market revisions. There is, “he says. Said.

“It’s not your dad — stagflation. Double-digit unemployment and inflation never go back to the 1970s.”

At that time, oil prices soared, followed by inflation. It peaked at over 12% in late 1974. The economy was hit by a recession in the early 1970s and growth fell to near zero.

October 11 Crude oil Over US $ 80 Barrel — its highest level From the second half of 2014..

Canada’s inflation It increased by 4.1% in the year to August. High price for the first time in 18 years— And some economists say this official number Underestimation True living expenses.Canada’s economy 0.3% In the second quarter; but it was mainly due to the blockade.

In favor of Canada, economic growth is expected to remain strong for the foreseeable future. NS International Monetary Fund The forecast for the economy was released on October 12, estimating that Canada’s economy will grow 5.7% in 2021 and 4.9% in 2022.

Is it temporary?

Therefore, it is not the weakening of economic growth that drives the story of stagflation, but the rise in inflation and oil prices. The debate is whether inflation is temporary. This is a good word for central bankers who characterize inflation in the current environment.

Inflation is expected to remain higher than the consensus view, Guatieri said, but will eventually be temporary. This is because we expect some of the supply chain bottlenecks to be resolved.

“If inflation doesn’t rise for the next six months or so, we expect inflation to continue near current levels,” said Guatieri.

Bank of Canada Governor Tiff Macklem said on October 7 that high inflation could be “a little more persistent” than the BoC had previously thought, but believes it is still temporary. reported. Globe and Mail..

According to a Deutsche Bank survey, the minority who see inflation as “nearly permanent” rather than temporary is growing, reaching 31%.

In addition, 59% of respondents expect crude oil to rise to about US $ 100 per barrel, while 27% say crude oil will fall to about US $ 60.

Inflation expectations

Aside from supply chain problems and rising energy prices, inflation expectations also play a role in determining where actual inflation is heading.

BMO October 8 memo We reviewed current indicators of inflation expectations and existing surveys and concluded that if expectations rose significantly, they would “show a more sustainable and sustainable change in the inflation outlook.”

According to the BMO, short-term inflation expectations are rising based on some research, but they do not help predict long-term inflation expectations.

However, in the United States, long-term inflation expectations measured in the bond market are above 2.5%.

“The steady rise in various long-term expectations indicators in the United States, the growing public interest in inflation in recent months, and the sustained strength of energy prices all change Canada’s expectations in a more meaningful way. It suggests that there is a possibility, “said BMO.

Inflation expectations in the United States could spread to Canada, Guatieri said.

“If inflation expectations worsen in the United States, it will probably worsen in Canada, given similar external forces and similar economic conditions,” he said.

More power on workers

Higher wages can help raise inflation, and Reed says increased union mention in environmental, social and governance (ESG) disclosures suggests a world of more workforce. I pointed out.

“Since the pandemic began, it seems that workers, especially low-wage or low-skilled workers, are becoming more and more empowered. The question is whether this is temporary (word 2021). “He said in a memo to the client on October 7th.

“ESG, social responsibility, and movements towards social justice suggest that this may not be the case. Also, higher wages offered due to staff shortages will be undone when they return to normal. Will be difficult. “

Companies with low-wage members may need to prepare for long-term wage increases, Reed added.

McClem said there are currently few signs that wages are rising faster than productivity growth and are an independent driver of inflation.

Rahul Vaidyanath

Rahul Vaidyanath

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Rahul Vaidyanath is a journalist in The Epoch Times of Canada. His areas of expertise include economics, financial markets, China, and defense and security. He has worked at the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York and Los Angeles.

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