With the services side of the economy still proving resistant to rising interest rates, it’s the labour market that may hold the key to solving what is fueling inflation
, may have been an unwelcome surprise for many Canadians, but it was entirely consistent with what the central bank has been warning about for months.had previously been declining, but it had been helped along by some favourable year-over-year gasoline price comparisons that have now faded out of the numbers.
Why haven’t 4.75 percentage points of interest rate hikes over the past 17 months been sufficient to slow down the economy enough to tame inflation? Why have usually predictable effects on demand and employment been so muted this time around? “If policy is not restrictive enough to bring inflation to target on a reasonable timetable, there is a risk that rates will have to be increased by even more later,” the summary document said. “If policy is simply taking longer to work because the lagged effects of nominal tightening are only recently starting to have an impact on overall consumption, over-tightening risks making economic conditions more painful than necessary.
While job growth has moderated, it remains much stronger than in any typical economic downturn. The unemployment rate has ticked up to 5.5 per cent from 5 per cent just a few months ago, but that’s still low by historical standards. But now, that glut of available jobs is a big part of the problem. It’s underpinning consumer demand even as borrowing costs continue to rise. It’s sustaining high wage growth, a critical fuel for inflation.
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