Soaring food prices, surging jobs could put pressure on Bank of Canada to return to rate hikes

Public outrage over a continued rise in grocery prices this week and the prospect of a strong jobs report may be signs that the Bank of Canada has not yet finished hiking interest rates.

Speaking to the Manitoba Chambersof Commerce on Thursday in her hometown of Winnipeg, the Bank of Canada's senior deputy governor, Carolyn Rogers, impliedthat despite the bank's pausethis week,there may be higher interest ratesahead.

"We can all agree, inflation is still too high," Rogers told the business audience. "It's come down a bit, but at 5.9 per cent, we have a long way to go to get back to the twoper cent target."

'Bank's pause is on shaky ground'

While the deputy governor held to the recent Bank of Canada forecast that the inflation rate would hit three per cent this year and be right on target at twoper cent by 2024, some of those listening to her speech sensed she was hinting those goals were optimistic if interest rates don't rise further.

"It looks like the central bank's pause is on shaky groundand it wouldn't take all that much additional evidence to spur them back into action," Desjardinseconomist Royce Mendes said in a note a few minutes after Rogers spoke.

Addressing the difficulty of battling inflation in the face of a still-strong jobs market where wages areoutpacing productivity with the danger of imported inflation from our biggest tradingpartners and on the prospect that energy prices could yet rise again Rogers repeated the bank's view that this week's pause in its key interest ratedependson how the economy unfolds.

In a single phrase, she addressed the predicament facing the central bank, where fighting the rising price of things like groceries only added tointerest costs for Canadian borrowers offering the bank an unpalatable choice between two painful options.

"We know that adjusting to higher interest rates has been hard for many Canadians," Rogers told the Winnipeg audience, twice breaking intoFrench, a language she's learning. "We also know that many Canadians are asking how exactly making their mortgages more expensive while they are still dealing with higher grocery bills will eventually lower inflation and make their lives easier."

Her answer to that rhetorical question may not be satisfying to those trapped between a plague of risingprices and the cure.

Storm of protests over food prices

Rogers offereda plain-spoken description of how inflation had turned from a global to a domesticphenomenon caused by a pandemic and what she called Russia's "senseless war" on Ukraine.

"This perfect storm of factors was showing up in Canadian grocery stores by the middle of last year," she said.

The problem is that as a storm of protests over grocery prices this week hasreminded politicians, even as the global prices ofenergy, grain and shipping have declined, Canadian prices of many essential consumer staples have continued to rise at rates above 10 per cent a year far above wage increases, which remain below inflation.

WATCH | Grocery prices? They'reno one's fault:

Grocery chain CEOs deny profits behind rising food prices

1 year ago

Duration 2:32

The CEOs of Canadas biggest grocery chains faced pointed questions on Parliament Hill about soaring profits and food inflation, but all denied that corporate earnings were behind rising food prices.

With everyone, including grocery store executives and their suppliers, denying they are responsible, it may be that the macroeconomic that is, the economy-wide impact of higher interest rates is the only solution to the problem.

Another sign that inflation is now increasingly down to domestic causes, Rogers said, is a tight labour market where workers are trying to catch up to inflation, whileemployers, anxious tofill jobs in a still-strong economy, are willing to pay.

In a pickle over productivity

The central bank, she said, is concerned that productivity roughly, the amount of goods produced per unit of labour is not rising enough to justify those wage increases. Instead, amidst a flood of immigrants and low-wage temporary workers, productivitya persistent problem in the Canadian economy has declined.

With wage increases still far below the rising price of groceries, Rogers did not ask businesses to justify rising profits, but she did point to the larger and more frequent business price hikes that bank governor Tiff Macklem told Parliament would have to end to help keep interest rates from rising.

In the media question-and-answer session, many business reporters asked about the effect on Canada if U.S. rates rise somethingthe chair of the Federal Reserve, Jerome Powell, told Congress this week could happen.

Some analysts suggest U.S. policy interest rates could increasefrom the current 4.75 per cent range to as high as six per cent to defeat persistent inflation.

While admitting higher pricesin our biggest trading partners, including the U.S. and Europe, caused by a sinking loonie could affect the Canadian economy and add to inflation here, Rogersrepeatedly told reporters the central bank did not target the value of the Canadian dollar which is allowed to rise and fall, or float, against other world currencies.

A falling looniewould be analyzed for its effect and "factored into our policy decisions," Rogers said."But the floating exchange rate is and will continue to be a key part of our monetary policy."