The Decibel - The good and bad of slowing inflation

Episode Date: September 22, 2022

Inflation is on the decline for the second straight month. New numbers from Statistics Canada show that inflation slowed to 7 per cent in August – down from 7.6 per cent in July and 8.1 per cent in June. While these numbers point to an easing in prices for consumers, not everything is cheaper – yet.Economics columnist for The Globe’s Report on Business, David Parkinson tells us what items are getting less expensive, why groceries are still so high and whether what the Bank of Canada is doing to tamp down inflation is working.Questions? Comments? Ideas? Email us at [e-mail]

Hi, I'm Mainika Raman-Wellms, and you're listening to The Decibel, from The Globe and Mail. We've been talking a lot about high inflation on this show, but now tides might be turning. They're actually slowing down the economy now. Maybe not a lot, but that's the goal, is to slow it enough to sort of to cool this inflation, not so much that they push us into a recession. David Parkinson is the economics columnist for The Globe's Report on Business. He's here to tell us what slowing inflation means for your wallet, and if these new numbers could tamp down fears of a recession. This is The Decibel. David, thank you so much for joining me today.

My pleasure. So inflation slowed to 7% this month, and that's a number that's lower than what financial analysts expected. Why is that? It is a bigger decline than people had predicted. But I think right now we're at a pivot point in what's been a very, very complicated period in history for prices and inflation. And so I really think that the economists and the financial analysts, the market people are guessing a bit, more than a bit. And what was their guess essentially? I think they thought 7.3.

So, you know, we came to, we were 7.6 in July. This was 7.0. I think we're going to go month to month where the guesses are going to be a little wrong. I think what really matters more is that it's going in the direction that people thought. And I mean, there were some positives. Obviously, it was a bigger decline than they thought. It means we've got a shorter road to cover if we're trying to get back down to what we would call normals, or 2% is what's targeted by the central bank. So to get all the way down there, at least we've shaved a few more

tenths of a percentage point off it. Yeah. And just to put things into perspective, I was looking back at last November, and then we were looking at inflation of four point something at that time. And, you know, we were getting all worried about that number then. So it's kind of all relative now compared to where we are today versus where we were last year. Yeah. And I mean, really, that does get to a point where, yes, it did sound high, you know, last fall and 5% sounded high and then 6% sounded high. And it is definitely a concern that we start getting too used to this. So this is why it's important to the policymakers at the Bank of Canada, and it's important to the markets. It's important to really all of us that this keep on heading in the right direction and

get back to numbers that don't sound, that we don't get too comfortable with the crazy numbers that we've been seeing. Yeah. A term that comes up a lot when we're talking about inflation is something called core inflation. David, can you just help me understand what does that mean? Yeah. Well, it's a matter of the people who are trying to measure inflation in a way that I guess sort of matters in terms of the bigger picture. They really don't want to be deciding on interest rate policy, for example, based on short-term swings in inflation. But the idea is to say, okay, well, how much inflation is the stuff that's sticky, that's kind of here even when those little price swings sort themselves out. And so it's kind of 5%-ish right now in Canada, which is still way too high.

And it's not coming down as quickly as the big overall number is. So that's the stuff that the Bank of Canada is really going to focus its attention on. When that starts to gain some downward momentum, then they'll know that they're on the right track. So let's break down what's behind this number. Let's look at the impact for consumers, first of all. So what is the good news here for consumers? The key element that has fueled this downturn, I should, fueled is a pun here because it's fuel, it's fuel prices, gasoline. Gasoline has come down, if you look at it month over month, and of course, when we talk about the inflation number, we're actually talking about a 12-month comparison. We're comparing prices to a year ago. But it's often more useful to look at what's actually been happening,

especially at these turning points in shorter timeframes. And if you look at the last couple of months, gasoline prices came down more than 9% in July and almost 10% in August. So this is a rapid decline in what was a very major driver of the inflation of the extremely high inflation numbers in the first place. So as this comes down, um, it's going to take more and more pressure off that, that big inflation number. So that was, that was the main story, but we're also seeing a lot of other things that are starting to slow at least. I mean, the prices might still be going up and still even going up more than we would have been comfortable with a year ago. But we're seeing, again, the pressure is starting to come off. Durable goods, for example, the prices of autos have slowed. Home appliances, that's also starting

to come off. Prices for hotel accommodations actually fell a little bit. And prices for shelter, for housing. It's sort of a broad category and Statistics Canada computes it in a bit of an odd way that we won't really get into. But it is at least an indication of what it actually costs for people to keep a roof over their heads. And again, that has started to slow. So all of these are going in the direction that they wanted. Okay, so there, some good news pieces here. Uh, what's, what's the bad news though?

Where are consumers still going to, going to feel this? Uh, it's, it's, it's in the grocery store. Um, those prices are, are looking sticky. Um, again, there's some hints that there's some of those pressures are starting to, to ease a little bit, but not, not as quickly as in some of the, some of the other places. And the overall number

for, again, on the 12-month comparison for grocery prices, it's a 41-year high in terms of the inflation rate. So I guess I'm wondering why that is, because groceries are, of course, a big expense for households. And almost 11% increase is pretty big. So why have we not seen food prices come down? Yeah, and it should be noted that actually, if you look at it month to month, it was basically unchanged. So they are flattening out. This is leveling off.

It's not, you know, the pace is not continuing to go up on food prices. You know, for one thing, we've got a war in Ukraine, and that's put a lot of pressure on food security throughout Europe and that has spread around the world. So that affects prices everywhere. That affects the price of wheat in Canada is affected by the price of wheat in Europe. But we should actually see some of these prices start to come down.

It's just a little stickier than something like gasoline, where the price of oil and the price of gasoline move pretty closely together. It's a long step between the price that a farmer is getting for his durum wheat and when that starts showing up in the pasta that you're buying in a package in the grocery store. So, you know, it can really take months before it kind of works its way fully through the grocery prices. That's actually, it's important to understand there then. So there's a bit of a lag when it comes to grocery prices. Do we have a sense, I guess, of when consumers can actually expect a little bit of a decrease in their grocery bill? I think we're kind of there. I think we're on the cusp. I think the grocery prices will probably start to, now maybe easing Isn't a, it's difficult. It's a lot easier for prices to go up than come down, but I would say certainly

over the fall and into the winter, I think we're going to stop seeing sort of the upward spiral that we were looking at. And for some goods, for sure, for things like produce, um, things like meats and breads, we'll probably see some, uh, start to see some relief. We'll be back in a minute. Okay, so let's talk about the Bank of Canada's role in all of this. Canada Central Bank, the Bank of Canada, has been pretty aggressive with interest rate hikes in order to try and stave off this inflation. For example, the bank surprised a lot of people when they raised the

key interest rate by a whole percentage point back in July. So is this week's inflation number, is that a sign that what the Bank of Canada is doing is actually working? Some of it absolutely is. When you do look at the things like the shelter costs, where the price pressures are easing, when you look at the durable goods, basically the kinds of things that people borrow money for, whether they're paying on credit or whether they're actually taking out loans

or in the case of homes, mortgages, maybe they're using home equity loans to finance various things. All of these things, that's the first place we were going to see them. And we are seeing that. So if I'm sitting in the Bank of Canada's offices, I'm happy that what I expected to happen first is clearly happening. To see it sort of more broadly, I mean, that's really the tip of the iceberg. But, you know, you want the tip.

You got to start somewhere, right? But yeah, they're going to want to see sort of the next stage where you start to see sort of more broad-based easing of price pressures, slower price growth, or even some downturns in certain items. And that's the kind of thing that comes really more from sort of a generalized slowdown in consumption and a slowdown in economic activity. And what do these new inflation numbers mean in terms of the Bank of Canada's future interest rate hike plans or what they may do in the coming months? Well, if I knew that, I'd probably make some money somewhere.

Your best guess. You know, I think it's safe to say that the next month they'll raise rates again. They're very committed to not losing momentum, not to lose any of the momentum that's already started here. So, you know, we still, we're at 7%. Their target is 2. They'd kind of probably be comfortable in between 2 and 3, but they're aiming for 2. So that's a very long way to go. And this is the easy stuff. So that's a very long way to go. And this is

the easy stuff. So we're going to see higher rates, but they have reached a level where they are aware that the rates are actually restrictive. They actually slow economic activity at this level. That's what their last rate increase earlier this month sort of put them over the level where they realized, which is roughly 3% was kind of neutral. So they're above neutral. They're actually slowing down the economy now. Maybe not a lot, but that's the goal is to slow it enough to sort of to cool this inflation, not so much that they push us into a recession. So from here, that's what they've got to gauge is how many more times can we go up before we sort of slam the brakes on too hard?

It's not really possible to look at this in isolation, right? We are affected by a lot of things that go on elsewhere in the world. And we often look to what's going on in the U.S. in particular, because what happens there does really impact Canada. And the U.S. released inflation numbers last week. Gas prices there also slowed for the second straight month. But other prices still remain high there. What's different in the states right now? Well, it appears, and again, it's all really hard to read.

And it was, I mean, that was definitely a surprise. There was definitely an expectation that we would see more progress in the U.S. here. And it's proving very sticky. And I do think that probably what's happened is that the US economy just overheated to an extent more than pretty much any other economy did. And it's just that the relief just isn't coming as quickly. But again, it's unclear how aggressively policymakers there will have to go on interest rates. There are signs of sort of cracks in economic activity, even though the inflation is still sort of stubbornly there, that there's evidence that business investment, for example, is looking less healthy than it did. Industrial, is looking less healthy than it did. Industrial production is looking less healthy than it did. And, you know, there's a lot of genuine concern, which

can sometimes feed on itself. Just the sentiment among businesses and among consumers can sometimes really turn the tide on that. So I think, again, the Fed is just going to have to really continue with the pressure of higher rates until it gets a clear sign that things are turning downward. But if the Fed takes one step too far, it really won't matter what the Bank of Canada does. If the U.S. goes into a recession, Canada is going into one. Or if we don't, we come very, very close to one. There's never been a US recession where the Canadian economy didn't make a significant downturn, maybe not quite tipping into a recession, but for all intents and purposes, we'd be there. Yeah. And just lastly, before I let you go, David, you mentioned that sentiment can affect

the economy. And we've talked on the show before about the wage price spiral, where if people think the prices are going to continue to go up, they'll demand more money from their jobs. And then those employers will continue to drive prices up. And all of this can drive higher inflation. So do you think the new inflation number from Tuesday is going to impact how people think about this? Well, what we know from going back 40, 50 years of history, we know that once the idea – once the expectations of rising prices becomes entrenched in business mentality and in the household mentality, then it tends to become self-fulfilling. But I think we've now had two months of success. We've seen after inflation peaked at 8.1%, we've now come down more than a full percentage

point in the space of two months. But we're still not where we were before all of this started. So, but I do think that if all of this continues to go in the right direction on a fairly consistent basis, that people will have a sigh of relief and maybe think that the central banks can guide things back to normal. And I mean, that's, the banks believe that's the case. They've, they've done their, their surveys and they believe that consumers still have faith that long-term inflation will be under control. So as long as their surveys keep on saying that they'll, they'll keep on fighting the fight the way they've been fighting them. Now, if their surveys suddenly show that consumers expect, uh, you know, five or 6% inflation for the next 10 years, then we got a problem.

Then they're probably going to have to step up rate increases to a whole new level. And yeah, I mean, at that point, if you call me back in here, I'll say, yeah, recession, mark it down. David, thank you so much for taking the time today to walk through this with me. Absolutely. My pleasure. That's it for today. I'm Mainika Raman-Wellms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer, and Angela Pichanza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.