How immigration could be impacting the Bank of Canada’s efforts to bring down inflation

[ad_1]

Demand created from a record influx of immigrants could be one factor keeping inflation higher for longer than anticipated, some economists say, though Bank of Canada governor Tiff Macklem doesn’t appear overly worried about it.
Sticky inflation prompted the Bank of Canada on July 12 to raise interest rates by 25 basis points to five per cent — the highest level since 2001. Though the inflation rate has fallen off its peak of 8.1 per cent last summer to 3.4 per cent in May, prices of more than half the goods in the consumer price index, such as meat, bread, coffee and rent, continue to rise, Macklem said in a press conference following the decision.

This advertisement has not loaded yet, but your article continues below.

The central bank now expects inflation to reach its two per cent target by the middle of 2025, instead of the end of next year as predicted in April.

But even as prices for key goods go up, the economy is proving more resilient than expected and demand momentum and consumption growth has been “surprisingly strong,” the bank said in a statement, pushing it to once again hike rates last week.

An increase in immigration could be one complicating factor keeping inflation higher for longer and stoking demand, Bank of Nova Scotia economist Rebekah Young said.

“There is more risk that inflation may be sticky in months and quarters ahead, versus it coming down faster than we thought and newcomers are a part of that story,” she said. “They are certainly adding to what could be keeping (Macklem) up at night.”

Canada welcomed more than one million immigrants in the past year as the federal government sought to address high job vacancies and labour shortages. Young said the country has traditionally used population growth through immigration as a means to increase workers and enhance supply, especially as “massive surges” of inflation haven’t been something policymakers have worried about for decades. But things have gotten more complicated.

This advertisement has not loaded yet, but your article continues below.

“A lot of things are different now,” she said. “The current juncture that we are in, getting inflation back to two per cent is still fraught with uncertainty.”

The current juncture that we are in, getting inflation back to two per cent is still fraught with uncertainty

Rebekah Young, economist, Bank of Nova Scotia

Macklem last week said he expects the net-impact of immigration growth on inflation to be “roughly neutral,” though he added it is impacting some parts of the economy more than others.

He said that while newcomers filling job vacancies has been good for company margins, easing inflationary pressures, new entrants are also increasing demand for housing, helping boost rent and home prices. It’s “hard to know exactly” the net effect on the economy, he added, but the main message is that immigration is adding to both demand and supply.

“If you start an economy with excess demand (and) you add both demand and supply, you are still in excess demand,” Macklem said. “What we’re seeing is that the excess demand in the economy is more persistent than we thought and so we’ve raised rates in June and July.”

Douglas Porter, chief economist at the Bank of Montreal, said he agrees with Macklem’s assertion that high immigration adds to both demand and supply. But there’s another element the governor “didn’t talk about much,” he said, and that’s a matter of timing.

This advertisement has not loaded yet, but your article continues below.

“(Strong population growth) does tend to affect things like spending and the housing demand almost instantaneously, whereas the supply side might take a little bit longer to kick in,” he said. “A new worker might enter the labour force relatively quickly, but reaching their full potential might take a little bit of time.”

In the short run, strong population growth tends to “push up the price pressures” a little bit, Porter said, but the impact in the longer run is “broadly neutral.”

Porter assessed economies of 20 nations to better understand the link between population growth and inflation and said he found a “very weak positive relationship.” Most of the impact is on the housing market, since there is a “very clear relationship between strong population growth and home prices,” he said.

Recommended from Editorial

Still, Porter also said Canada has fared better than most nations in terms of tackling inflation, meaning there are “larger forces at play here, beyond just population growth.”

[ad_2]

Source link