Why monetary policy for the 2020s must be pro-worker

This column by Armine Yalnizyan was originally published by the Toronto Star on Wednesday January 25, 2023. Armine is a Contributing Columnist to Toronto Star Business featured bi-weekly.

On Wednesday morning, the Bank of Canada bumped its key overnight lending rate to 4.5 per cent. The move will impact your job, your business, your housing, your savings. So much of your life.

The increase of 25 basis points, (a quarter of a percentage point), was largely expected by the majority of economists in Canada. It’s the highest the rate has been since December 2007, before the global financial crisis exploded.

It’s also the eighth rate hike since March 2022, the Bank’s most aggressive suite of rate actions since 1978-1979.

Though inflation is indeed cooling in Canada, it’s likely not because of rate hikes.

The pace of year-over-year inflation has slowed in recent months, though it’s running more than three times the target rate of two per cent. The majority of consumer prices actually fell over the past month, except housing costs and groceries. Up 11 per cent from last year, food inflation has outstripped general inflation for 13 months now.

The biggest price drop in the past month was for fuel prices (down 15 per cent), driven mostly by supply, though these costs are still 51 per cent higher than a year ago. Expansion in the supply of shipping containers and shipyard workers has pushed shipping prices down to almost pre-pandemic levels. Lower child-care costs (down 12 per cent) are due to a federal government policy initiative to get parent fees for licensed care down to $10 a day.

You will note the major reasons for decline in the pace of inflation are unrelated to central bank actions. You will also note the biggest increases in prices — for housing, already at historic highs — are due to central bank actions.

What goes up may not come down. Central bankers and commercial bankers in Canada are almost mum about corporations passing on cost increases while profit margins soar, but repeatedly warn that if workers push for higher wages to catch up to prices, they will bake in future inflation.

Is it happening? No.

For the labour market as a whole, wage growth has lagged inflation in 2022, and is cooling, running around five per cent higher than last year by December. Ironically, unionized workers have fared worse: major collective agreement settlements since August have seen annual average increases between 1.7 and four per cent for the next three years, well below the rate of inflation.

I’m aware of only one authoritative economist who has dared suggest that the dreaded wage-price spiral might not be a thing, and that caution in continued rate increases to “tame” inflation may be merited.

Let me introduce you to Lael Brainard, vice chair of the Federal Reserve, the central bank of the U.S.

Brainard recently said “wages do not appear to be driving inflation in a 1970’s-style wage-price spiral.” Hold the phone, Joan. This simple, fact-driven statement undermines the main central bank argument for weakening the labour market to combat high inflation.

There is no Lael Brainard in Canada. No one of equal stature who receives regular coverage by mainstream media has resisted a flick at wage growth as a potential problem, even if it isn’t one now.

Brainard’s counterpart, Carolyn Rogers, senior deputy governor of the Bank of Canada, and Tiff Macklem, who heads the Bank as governor, started to hammer away in the summer at the idea that workers shouldn’t try to recoup purchasing-power losses due to inflation.

Why? Because they are gonna fix that problem, and you all better believe it.

For central banks everywhere, inflation-taming now is an expectations game. A credibility game. And there’s just one play: rate hikes.

Let’s be clear: rate hikes have very high costs, mostly for workers, and particularly the poorest paid; and very little to show in the way of lower prices for the pain they cause, in the form of less work and suppressed wage growth. And, as the history of inflation in Canada shows, prices sometimes cool without central banks’ help.

Inflation is a shape-shifter. Its drivers are constantly changing but it’s always about supply and demand. Today’s bout of inflation is unlike anything experienced in the 20th century. Its collision of causes include pandemic shocks, geopolitical realignments, extreme climate events and the bluntest force of all: demographics.

Given the underlying dynamics of what’s pushing prices up or down, the idea that central banks raising rates is why inflation is being “tamed” seems rather boastful.

In fact, standard-issue monetary policy from the 1990s is not well-aligned with the realities of the 2020s.

The monetary policy being prescribed today is anti-worker. Back in the 1990s, it unleashed a protracted recession (unemployment rates soared to 12.1 per cent by November 1992 from 7.3 per cent in March 1990), while the federal government of the day cut funding and benefits for the jobless.

The 2020s has to be more pro-worker. Every region is marked by labour shortages that normally trigger better wages and working conditions. Central bank advice for avoiding entrenched inflation (wage growth around target inflation rates of two per cent) is a recipe for making more businesses “unsustainable” … say businesses themselves.

It’s not an argument you read very often.

In an admittedly unscientific review of mainstream media stories, I searched which voices are quoted in stories about inflation in Canada.

Chances are it’s a bank or business economist. Guess what? Bank and business economists don’t work for you. They work for money.

In Canada, few economists besides Jim Stanford, director of the Centre for Future Work, and myself regularly speak about impacts on people and workers. We are not considered “mainstream.”

The information system is skewed toward “business news” about investments, stock markets and maintaining the status quo.

But the status quo is exactly what needs to be examined. Canadian economists need to get serious about the question Canadians are all asking: Are central banks taming inflation or just raising my costs?

Because without better arguments, rate hikes are looking increasingly like performative art.