Central bankers play down soaring cost of living

How big of a raise didyou get last year? In Canada or the U.S.,if it wasn't in the fourto five per cent range you really did not get much of an increase at all.

On Wednesday, after a year ofrepeating that he wasn't going to discuss cutting back on monetary stimulus, the world's most powerful central banker,Jerome Powell, finally changed his tune.

The chair of the U.S. Federal Reserve said he and advisors are now "talking about talking about" cutting back on bond buying a key part of stimulus during the pandemic, and the bank signalled interest rates hikes could come in 2023.

But as prices in Canada soared by 3.6 percent,hot on the tail ofU.S. inflation currently running at five per centafter that economy opened up sooner,it is by no means clear those efforts will give you back the money you've lost.

Less car, less gas, less house

Even while prices continued to surge, both Powell andBank of Canada governor Tiff Macklem, who addressed the Canadian Senate Wednesday evening, continue to insist that the inflation we are seeing now is a flash in the pan.

Price increases, they say, will head back downtoward two percent after the pandemic's distortions have passed and the economy gets back on track.

Speaking to the Senate committee on banking last night, Macklem reiterated his view that inflation is transitory, to alarge extent caused by what the central bankers call "base-year effects" sincepricesnow are being compared to prices last year, which fell just after the pandemic hit.

"As these base-year effects fade [the central bank] expectsthe ongoing excess supply in the economy to pull inflation back down," Macklem told the assemble senators.

But that won't push wages up.

For consumers, the problem is that price inflation is cumulative. Unless your wages rise by an equivalent amount this year, your monthly pay will continue to buy you less stuff.As yesterday's Statistics Canada data showed, it will buy you less car,less gas, less clothing andless house.

And while inflation did decline by a fraction of a percentage point in April (-0.2 per cent) and May (-0.4 per cent) of 2020, it was by no means enough to make up for this year's huge rise in prices. Especially since by June,prices were on the rise again, up 0.7 per cent.

Rising wages?

But workers may have a chance to catch up. Although Powellwas discussing the U.S. rather than the Canadian market, labour demand tends to filter across the border just as inflation does.

One of the reasons Powell said he was willing to let inflation continue to climb without stomping it down wasspecifically to create jobs and help raise wages, giving unemployed low-wage workers hardest hit by the pandemic a chance to catch up.

"If you look at the forecasts, we're going to be in a very strong labour market pretty quickly here," Powell told reporters at Wednesday's news conference. "There's every reason to think that we'll be in a labour market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum."

Unlike in Canada, one of the roles imposed by Congress on the U.S. central bank is creating jobs in the economy. The other one, similar to the duty of the Bank of Canada,is to keep inflation steady at around two per cent, although last night Macklem discussed with senators the possibility of adopting the U.S. "dual mandate" system.

Powell said the bank learned a crucial lesson from its last attempt to stimulate employment following the 2008 financial crisis and recession.

Wage and price spiral?

Then, as U.S. jobless levelsfell to record lows, there were repeated concerns that the economy had run out of workers and that would pushwages and inflation sharply higher. Instead, the bank discovered more and more people who had ostensibly not been looking for a job were enticedintothe workforce, holding wages down. Powell hopes letting stimulus run will make that happen again.

"We don't see anything that's troubling, in the sense of very wide across-the-economy wages at unsustainable levels," said Powell,noting there is no sign of a traditional wage and price spiral that has driven inflation in the past. He implied that overall wage increases may come from people switching jobs to other jobs that pay more.

For financial markets the big issue was not the prospect of higher wages, but the fact that Powell officially broke his silence on tapering. That'sthe idea that the Fedwould stop stimulating using quantitative easing the bond-buying that both U.S. and Canadian central banks have done to increase the amount of money circulating in the economy.

Unlike Canada, which formally announced it was cutting quantitative easingback in April, Powell said the Fed is still only talking about it. Nonetheless, markets retreated on the news, raising fears of a new "taper tantrum" when the central bank actually announces somethingdefinitive.

And although the Powell did not officially announce rates would rise any sooner,data released with the monetary policy report showed that a majority of his advisors are also now following the Bank of Canada's lead, projectinginterest rates will begin to rise in 2023, not 2024.

AsMacklem told the senate committee last night, the way the current economic crisis came starting with a bang, and ending, possibly, just as suddenly has made it hard to decipher.

"Everything about this crisis is so unique," said Macklemin his meeting with senators.

It was a feeling echoed by Powell earlier in the day who said thata highly unusual pandemic-caused recession and recovery increases uncertainty a few notches above the normal level of wariness of economic predictions.

"I think we have to be humble about our ability to understand the data."

Follow Don Pittis on Twitter @don_pittis