Canada’s top banker made an unusual move and began explaining his actions in the news. In an opinion piece last week, the Bank of Canada (BoC) governor Tiff Macklem didn’t let his work speak for itself. Instead, he took the unusual step of writing his own defensive opinion piece. Let’s take a quick dive into his statements, and what they mean.
Crafting The Narrative
The sitting head of the central bank made the unusual move of writing an opinion column. Instead of using fancy data points, he whipped out a pen and provided no evidence to explain the current inflation environment. It wasn’t his first time either, with economists previously asking him to provide any evidence for the statements he’s made.
In it he explained his version of why inflation is high, it’s transitory, and changing the methodology of how it’s measured will prove him right. Let’s unpack each of these points because they have zero data to back them up. Canadian bank economists have warned these statements he’s made prior were completely not founded in any factual data.
Inflation Is Higher Due To Plunging Prices Last Year? Tiff, Please
Macklem repeated his explanation that higher prices are due to a base effect. He believes, or at least keeps repeating, that inflation only looks high due to a base effect. That is, prices fell last year, and consequently, it’s amplified annual growth for inflation this year.
“Why is inflation higher now? It’s mostly because of the unique circumstances of the pandemic. Prices for many goods and services plunged last year,” he explained in the piece.
Just one problem — that’s not even close to true. The annualized 3-month rate of growth for CPI reached was 4.0% in June, indicating recent growth has accelerated. In fact, most of the annual growth is recent — not just when observed year over year. That isn’t a base effect at play.
As for the fall last year, even a Big Six bank has said that’s not true. A few key commodities experienced brief price drops, such as oil. However, the bank’s economists said the majority of goods and services increased in price consistently.
Inflation Is Low… After The Way It Was Measured Changed
The next point the central banker makes is that Statistics Canada has updated the basket used for inflation. The updated basket shows CPI’s annual growth fell to 3.1% in June, the first month it was used. It’s still a touch over the operating band they put in place, but not as high as the month before. “The updated index shows clearly that prices of many goods and services are rising quickly,” he said.
About that updated basket… the changes are almost certain to print lower inflation in the future. I explained this in detail a few weeks ago, but the gist is the basket will be updated to reflect “pandemic spending.”
This will allow areas with higher spending last year to have a bigger impact going forward. Since those boosts in prices were considered temporary, it places more emphasis on the decline than the increase. Ultimately, inflation data would be kept lower.
No, I’m not just some wacky inflation truther, a Big Six bank also agreed with that take. They presented it the opposite way, saying the new basket minimizes the areas with the highest expected growth. In the end, they said Canada is making a big “mistake,” that would chronically “underestimate” inflation going forward. That’s one way to keep inflation low, I guess.
The attempt at narrative crafting is an odd one for Canada’s central bank. It’s a technique that became popular with the real estate industry on the West Coast a few years ago. When someone comes out of the woodwork to say “don’t worry about things,” it almost always means you should worry about them.
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