Canada is really struggling to grow right now: Senior economist
As a Bank of Canada official cautions that corporate price increases are contributing to the country’s sticky inflation, experts say there are alternatives to fixing the problem besides interest rate hikes.
Bank of Canada bank deputy governor Nicolas Vincent made the case in a Tuesday speech that price increases by Canadian businesses have persisted more frequently than they did before the pandemic, leading to stronger-than-anticipated inflation.
Instead of pursuing more aggressive rate hikes to fix the problem, an economist who has studied the relationship between corporate price-setting said inflation price regulation and fiscal support may be needed to tame inflation.
“What we heard from the bank was a recognition that corporate pricing strategies have been critical to explaining post-pandemic inflation,” Jim Stanford, economist and director of the Centre for Future Work, told BNNBloomberg.ca in a phone interview on Tuesday.
He argued that instead of hiking rates further, the Bank of Canada should be patient, because the surge in profits at some companies may be over now and supply-side factors are normalizing.
“The announcement, in my view, is the bank saying there may be factors to inflation that are out of our hands and we need other policies to help,” Stanford said.
He explained that policies such as price regulation for certain essential industries might be necessary to avoid outsized profits during a crisis that could ultimately lead to a rise in the cost of living.
Stanford published research last year that found that the highest level of corporate profits were concentrated in a small number of sectors saw the fastest rate of inflation, including oil and gas, mining, real estate and grocery.
“It wasn’t every company that hiked prices, it was the ones in the positions where they knew consumers had no choice but to pay. We’re talking about the food industry, the energy industry, auto makers and financial services,” he said.
Canadian grocers, for example, have come under public scrutiny for profits made throughout the pandemic up until now, while the cost of food soars. The federal government has given big players in the sector a Thanksgiving deadline to come up with a plan to make groceries more affordable for Canadians.
"Jawboning business leaders to restrain price increases, and to more quickly pass on cost savings that are now visible in the food supply chain, can have an incremental impact," Stanford said.
Such policy moves will be more effective when the government has more forceful measures, such as the excess profits tax contemplated by the standing committee on Agriculture and Agri-Food, in its back pocket, he added.
The Bank of Canada’s mention of corporate prices highlights the fact that wage growth and a growing population aren’t the only factors to be considered when thinking about inflation, Stanford added.
“It’s not wages that are driving up costs, it’s employees demanding more wages to keep up with the cost of things,” he said.
SMALL BUSINESS IMPACT
Unlike large corporate firms, smaller Canadian companies have only now been able to hike prices order to stay afloat, Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business (CFIB), told BNNBloomberg.ca in a phone interview.
“We know these price increases are higher than the Bank of Canada would like to see, but at some point firms have to pass on costs to their customers or else they will face going out of business,” he said on Tuesday.
Small business owners in particular have had held off on passing costs off to their consumers since they know it would lead to weakened demand for their products — but the lag is catching up now, Kelly added.
He added that taming stubborn inflation must be a group effort from both the private and public sectors, as wage pressures coming down from the provincial government have ultimately led to business owners hiking prices.
“We need to be in this fight together if we’re going to see some relief,” he added.