Despite good economic news, experts warn the pain’s not over yet
Inflation is back at the coveted two per cent annual rate.Wage hikes have outpaced inflation for 19 months in a row.The Bank of Canada is three rate cuts into an easing cycle, with no signs of stopping anytime soon.The recent run of positive economic news had the Liberal government — long challenged by an affordability crisis in Canada — celebrating in the House of Commons this week.Finance Minister Chrystia Freeland on Tuesday hailed the August inflation report as “good news for Canadians” and the “light at the end of the tunnel” after years of surging prices and pandemic-related disruptions in the economy.RBC assistant chief economist Nathan Janzen tells Global News that there’s indeed reason to celebrate as price stability shows signs of returning and the Bank of Canada unwinds from the most rapid tightening cycle in its history.But he also warns that focusing on inflation and rate cuts may ignore economic pain looming for Canadians around the corner.“Light at the end of the tunnel, silver lining, whatever the phrase you want to use is, it’s important to remember that what we’re seeing in terms of inflation and the interest rate cuts is a result of a softening Canadian economy,” Janzen says.“So it’s not all great news.”Quick refresher on how all of these dynamics play together: when inflation is trending away from the Bank of Canada’s two per cent target, the central bank will raise its policy rate in an effort to rein in rampant price growth.Higher interest rates raise the cost of borrowing for Canadians, businesses and governments.
That discourages big purchases and encourages saving, which slows down the economy and gives supply time to build up while demand dwindles.From all accounts, that’s been happening.
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