Writing in the Globe and Mail, reporter Tavia Grant notes that Canada’s inflation rate has “confounded forecasts”, remaining below 1.5% for 18 consecutive months. She quotes Macdonald-Laurier Institute Senior Fellow Philip Cross, who says the trend is a “real head-scratcher” but suggests that technology and China’s impact on the global economy are “long-term forces keeping prices down”. The story goes on to report Cross’s explanation of the likely impact of a low Canadian dollar:
But the era of moribund inflation may be coming to an end. The weaker Canadian dollar will eventually put upward pressure on prices as import costs rise. The quickest prices to respond will likely be gasoline, natural gas and home heating, said Mr. Cross. Industries with heavy reliance on energy, such as airlines and trucking, will be faster to raise prices. So will sectors with little inventory, such as travel services, while there may be a lagged result among firms with a lot of inventory.
That said, research shows exchange rates aren’t the biggest influence on consumer prices. “We’ll see a slight upward push on the overall CPI from this, but the big story over the next year is a continuation of the very low rates of inflation that we’ve seen for five or six years now,” he said.
The economy is too weak to support a big increase in prices, he said. With tighter household budgets, if consumers find they’re spending too much at the pump, they’ll cut back on other expenses.
Until overall employment and wages start to pick up, “you’re not going to see consumers increasing spending across the board, which is what you’d need to see for some increase in inflation.”
Cross previously published an op-ed in the Globe about the negative impacts of a low dollar. To read it click here.