Slowing inflation does not mean you get your spending power back

Investors in the financial markets were thrilled to see that inflation data showed that prices had fallen in the United States.

Business journalists frequently suggest that higher share values are a sign of good fortune. However, it isn’t clear that Canadian working people, particularly those without the funds to invest in stocks or bonds, are ready for a sigh.

As we wait for Canada’s own inflation rate out Tuesday — also expected by economists to be down from its high — there may be good reasons to think that even for market traders, last week’s euphoria may be premature.

Are you prone to irrational rebounding? 

Some financial commentators considered last week’s stock jump to be a bearish market rally. A rational rebound.

The Canadians I spoke with, representing academia, labour, and the private sector business, had strong reservations about the notion that falling inflation is a panacea for everyone.

The cooling market for property, where many Canadians have saved, is showing little signs of slowing down.

A decline in spending power can have lasting effects that may not be reversed.

A slump in consumption due to falling wealth and wages is likely to impact Canadian businesses severely and could be a sign of greater economic trouble ahead.

“Companies that were capable to increase” [prices] “Passing on the higher costs to consumers would benefit, at least in short-term,” said Gurupdesh Pander, economist and professor of finance at Ontario’s University of Windsor’s Odette School of Business.

Pandher can understand why the markets responded positively to signs that inflation was falling. This could indicate central banks may not have to raise interest rates nearly as often or as quickly. He is concerned that the soaring prices of the past year have already caused irreparable damage.

He is the problem. said, is that inflation is cumulative — like compound interest in reverse. You cannot get your spending power back if the inflation rate drops.

Workers are never able to catch up

Pandher cites the example of his university’s employee wage contract as an example. He describes it as a microcosm for the entire country. The contract was signed just last year and provides for increases of 1% per annum for three years and slightly more in the fourth.

Even when inflation was rising at the central bank’s target range near two per cent, an increase of one per cent would mean real wages — where real means after taking inflation into account — They were slowly falling in realityThis resulted in employees’ purchasing power constantly decreasing.

Despite Canadian inflation being in the 8 percent range, it is much more severe. It means that real wages for these employees fell by 7 percentage points this year. Pandher said Even if inflation slows, employees will still be “14-15 percent below the inflation rate by the end the contract period and they will never catch it up to them.”

This is not only bad for workers, but also for businesses. The economy’s total spending is decreasing.

Pandher: “Keep in mind, if wages don’t go up enough, consumers will have less money to buy in future, so that is going to come back to bite those companies also.” said.

Inflation can sneak up upon you. Many workers may not realize that what appeared to be a wage increase was actually a decline in real wages after high inflation. said Bea Bruske is the president of Canadian Labour Congress (CLC). 

Now they are getting a crash program. 

“They don’t have time for economic theories to think about,” said Bruske called from Las Vegas, where she was speaking at a United Steelworkers Convention. It was obvious that inflation was causing severe pain. “But they can still feel the pinch in your pocketbook.”

Revitalized union movement

Bruske was born in Manitoba and immigrated as a child to Canada. She was elected president of the CLC last year, just after inflation had risen above three percent. She has been a CLC president since then. saidThe decrease in worker spending power Some employers increase profits while others make little. The North American union movement has seen a revival in recent years. It was a wake up call to see the pain inflicted by their members’ real wages falling.

“I believe it 100%.” said Bruske. “I believe that many unions are doing some soul searching, if not all.”

She said Labour unions are becoming more active and mobilizing their members. They also “organize outwardly” in order to increase membership in areas that they may not have previously seen as necessary.

Bruske replied indirectly to the question, however, when asked if that would lead to an increase economic disruptive labour action.

She stated, “I believe we are in for many more strikes votes.” said.

Karl Schamotta is the chief market strategist for U.S. payments company Corpay. He doubts that Canadian unions have the power to raise wages. Induce a new wage price spiral. He nevertheless, said The tight labor market has resulted in workers losing their bargaining power.

Like Pandher, he is not convinced that signs of a decline in inflation means the economy can escape a downturn — even if a worker shortage means the job market will not suffer as much as in the past.

WATCH: There are signs that inflation could be falling in Canada| There signs that inflation may be dipping in Canada: 

As some commodities prices fall, inflation shows signs of slowing

As prices rise for commodities like oil, lumber, and real estate, there is reason to be cautiously optimistic that inflation in Canada has reached its peak.

He stated that employers are likely to try to keep their workers longer than in economic slumps past. said.

Do not look down

“Specifically, we are considering a large-scale and sustained fall in home prices across Canada. Particularly in major cities. That is going to affect how wealthy consumers feel,” said he. said.

Like the cartoon Coyote that has run off a cliff face, he saidCanadian consumption has already started to decline but the consumers and businesses that depend on it have not yet noticed.

Tiff Macklem is Canada’s chief central banker. said Inflation control with high interest rates is the only way for workers to not lose their wages. This has been repeated repeatedly. Even at the expense of destabilizing markets Canadian homes

Schamotta believes that market optimism about signs of inflation-fighting success will mean that interest rates rises will slow down despite this. said The central banks may not be able to send the message until inflation has been eliminated. 

Instead he saidIn future monetary policy statements, they might decide to “pour cold water” on the notion that monetary conditions will become looser in the near future.

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