Canadian inflation surged to a multi-decade high while the jobless rate plunged to a low. In April, the consumer price index (CPI) remained higher than the unemployment rate. According to the National Bank of Canada (NBF), it’s only happened a couple of times before and it was bad news.
Canada’s Inflation Is Now Higher Than Its Jobless Rate
Canadian inflation surged to a new record high while the jobless rate hit a new low. CPI annual growth registered at 6.8% in April, a 31-year high. At the same time, unemployment fell to 5.2% in April, the lowest going back to 1976. That might not stand out to many people, but it did for NBF chief economist Stéfane Marion.
“CPI inflation is well above the unemployment rate for only the third time in about fifty years,” said Marion. It’s a rare circumstance and historically hasn’t been good news for the economy.
Canadian Inflation Is Rarely Larger Than The Jobless Rate
Canada rarely sees inflation higher than the jobless rate. It’s supposed to be one of the benefits of being in an advanced economy with a stable currency. NBF found this has only occurred twice in the past 50 years — in March 1973 and May 1977. That period might seem notable to monetary policy history buffs (hey, there are dozens of us! Dozens!).
In the previous occurrences preceded a period of stagflation. Stagflation is when inflation is elevated and unemployment begins rising, forcing rates to rise along with poor economic conditions. The Bank of Canada (BoC) changed how it measured inflation not long after, claiming the old method was useless.
“Gerald Bouey was the Bank of Canada (BoC) Governor during this period and the institution was using monetary aggregates as intermediate targets to anchor inflation,” he explained. “After seeing inflation surge for the second time in four years, Mr. Bouey quipped,” we didn’t abandon monetary aggregates, they abandoned us”. By 1982 the BoC was done with money supply targeting.”
And if there’s anything we’ve learned from history, if you don’t like the indicator, abandon it and find a measure you want. It may be equally inaccurate, but it will take a whole 50 or so years to figure that out, so relax.
Bank of Canada Ignored Inflationary Pressures
NBF wants you to keep that in mind as we fast-forward to today, where the BoC is still ignoring indicators. The central bank declined to raise rates due to their belief inflation was transitory and the jobless rate was unreliable. In other words, they dismissed two key readings designed to stabilize inflation. Marion very much believes that was a mistake.
“As recently as last November, the Bank of Canada stated that the unemployment rate did not fully reflect the experience of individual workers during the pandemic and, therefore, the extent of labor market slack and resulting inflationary pressure,” he explained.
“With the jobless rate at a 48-year low of 5.2% and inflation well above that level, we think that low unemployment is still a good indicator of inflationary pressures. Unlike the monetary aggregates of the 1970s, the BoC can’t claim that the jobless rate has ‘abandoned us’ in assessing domestic inflationary pressures.”
The BoC is one of the only major central banks to not publish a jobless rate forecast. They also made a decision based on the potential impact to the jobless rate. It’s like not making a decision due to the potential consequences of your actions, without considering what those consequences would actually be. In hindsight, that’s very BoC in the 2020s.