Posthaste: No 'compelling' case yet for Bank of Canada interest rate cuts, economist says

financialpost.com:

Stagflation could rear its head in Canada as geopolitical events coupled with a downbeat business outlook threaten to play havoc with the Bank of Canada‘s best-laid plans for getting inflation under control and cutting interest rates, suggests one economist.

Expanding global trade fallout from attacks in the Red Sea corridor leading to the Suez Canal and elevated inflation outlooks in the most recent edition of the Bank of Canada’s business survey have led Sebastien Lavoie, chief economist at Laurentian Bank of Canada, to conclude that stagflation could be in the cards.

“Combined, these two dynamics make Canada’s economy more susceptible to mild stagflation conditions,” he said in an analysis, following the release of December’s consumer price index data, which showed the pace of inflation accelerated 3.4 per cent year over year, up from 3.1 per cent in November.

Stagflation, which walloped the Canadian economy in the 1970s and 1980s, combines a trio of monetary bogeymen, including uneven or contracting growth coupled with elevated inflation and unemployment. At the height of the stagflationary period in the ’80s, Canada’s unemployment rate rose at one point to 13.1 per cent, while the consumer price index sped up 12.8 per cent.

“I want to make clear it’s not the same form of stagflation, at all,” Lavoie said.

For full-blown stagflation, “you would need more damage on the real side of the economy — unemployment closer to seven per cent — and real GDP more convincingly declining for two quarters,” he said. Rather, “there’s suddenly right now more flare-ups or ingredients than there were before that may push us into … a gentle form of stagflation.”

This isn’t the first time talk of stagflation has flared up recently. The