There are a lot of reasons for the Bank of Canada to feel it’s winning the inflation fight, like weakened household borrowing and spending and a broad-based slowdown in the inflation rate itself. One trend not going the bank’s way: rising wages.
Last month the average hourly wage rose 5 per cent from the year before, a level the bank says is “inconsistent” with getting inflation under total control. That’s because fast-rising wages can stoke inflation by increasing the costs faced by companies and fuelling spending.
So it matters a lot whether wage growth will stay strong. Earlier this week the bank released the latest results of its quarterly surveys of how businesses and consumers view the economy. Both surveys asked: what will happen to wages over the next year?
The results were mixed. Businesses expect wage growth to ease to a little over 4 per cent a year from now, while consumers – who think wage increases are lower than they actually are – expect wage growth to come in at nearly 3 per cent. As Scotiabank economist Derek Holt noted this week, “One of either businesses or consumers will be wrong despite both measures being elevated.”
By looking at recent history and comparing how wage expectations lined up with actual wages a year later, it suggests businesses have a much firmer grasp of where wages are headed.
The gap in wage expectations, which remains much wider than in late 2020, may reflect the fact business owners have a better sense of labour market conditions and raw material costs as part of their planning. For workers, on the other hand, wage growth in inflation-adjusted terms was negative until earlier this year, which may feed into why consumers have lower expectations for their paycheques in the future.
Whatever the case, if either group’s expectations become reality a year from now, wage increases may be too strong for the Bank of Canada’s comfort.
Decoder is a weekly feature that unpacks an important economic chart.
Jason Kirby