Postmortem: Macklem goes direct to consumer

Postmortem: Macklem goes direct to consumer

August 2, 2021 Off By administrator

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Financial Post columnist Kevin Carmichael, editor of the FP Economy newsletter, unpacks the week in economics.

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Cooling breeze

The inflation boogeyman suddenly looks a little less scary. Statistics Canada reported on July 28 that the consumer price index (CPI) increased 3.1 per cent in June from a year earlier, faster than the Bank of Canada would like under normal circumstances, but much more manageable than the 3.6-per-cent pace that statisticians clocked in May.

June probably is a truer representation of the trend. The May reading was exaggerated by the way inflation is conventionally expressed. Economists tend to benchmark Statistics Canada’s latest monthly update of its CPI basket with the index’s level a year earlier. Prices were contracting in the spring of 2020, so year-over-year comparisons in 2021 were always going to be distorted. By June of last year, the economy was starting to recover, so “base-year effects” will start to fade.

The pandemic will continue to influence price dynamics in other ways. The cost of buying a car put upward pressure on inflation in June, as a shortage of computer chips has slowed production, creating an imbalance between supply and demand. That sort of thing is happening across the economy, and nowhere more so than in housing, where demand has received a nitrous shot from historically low interest rates and supply was already chronically constrained. Higher prices put upward pressure on inflation (as measured by the CPI) by raising the hypothetical cost of moving house.

But the story isn’t quite as simple as that. The chart below is a version of one that Bank of Montreal chief economist Douglas Porter circulated last week. It shows that low interest rates have offset higher prices almost perfectly. There is downward pressure on inflation, too.  

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Direct to consumer messaging

Bank of Canada Governor Tiff Macklem told his counterparts at the annual Jackson Hole conference last summer that central banks had been doing a poor job of connecting with the public and that he intended to rely less on economists and journalists to interpret the Bank of Canada’s thinking for the masses. Macklem has been giving a lot of interviews since taking over as governor 13 months ago, but on July 29, he decided to ensure that his message was delivered to the reading public unfiltered by writing…

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