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Customers shopping at Ponesse Foods in Toronto’s St. Lawrence Market, are photographed on Jan 19, 2022. Inflation has increased the price of groceries with foods such as grapes and mushrooms going up in price, alongside other grocery items.Fred Lum/The Globe and Mail

As Canadian inflation hits a three-decade high, the average worker is facing an unwelcome reality: Their pay isn’t increasing at nearly the same pace.

There are many ways to measure wages, but they tend to show real (or inflation-adjusted) wage growth has been negative for most of the past year. In effect, this amounts to a pay cut and the loss of purchasing power.

For many Canadians, it’s an added layer of frustration as they navigate general price growth of nearly 5 per cent and sticker shock on everything from cars and appliances, to groceries and home insurance. And their wages aren’t budging much amid a chronic shortage of labour – conditions that should be ideal for pay raises.

Workers have a fairly downbeat view of the future, too. They expect annual inflation of 4.9 per cent a year from now, according to a Bank of Canada survey published Monday, but wage growth of only 2 per cent.

The situation is putting pressure on the central bank to rein in price growth. Several analysts are projecting the Bank of Canada will start next week to raise its key lending rate from a record low of 0.25 per cent.

Few workers have begun the year with a pay raise. Two-thirds of survey respondents said their pay isn’t adjusted for inflation, while another 17 per cent said their wages are hiked informally.

“Let’s face it, there’s a lot of persistence to wages,” Bank of Montreal chief economist Doug Porter said. “The reality is, they just don’t respond that quickly to inflation.”

Stimulating the economy was easy. Taming inflation will be much trickier.

Throughout the COVID-19 pandemic, wage comparisons have been a fraught exercise. The early months of the health crisis saw disproportionate losses of low-wage work, which served to boost average pay across the economy. Combined with meagre inflation, real wages soared for a brief moment in 2020.

More recently, wage hikes have been lukewarm. In December, the average hourly wage rose 2.7 per cent from a year earlier to $30.48, based on a survey of households. That was identical to wage growth in the two decades preceding the pandemic.

Another gauge of hourly wages – culled from payroll data – found annual growth of 3 per cent in October, with pay accelerating since the spring. The Bank of Canada’s preferred measure for wages – which is derived from several indicators, including the two above – grew 2 per cent in the third quarter.

Regardless of the metric, real wage growth is tracking at roughly negative 2 per cent of late. It’s not only a Canadian phenomenon, either, with high inflation eating into wages in the United States, Britain and elsewhere.

The longer view is more favourable. Over the past two years, the payroll measure of wages has grown 6 per cent, or a shade higher than inflation, which was sluggish over the early stages of the pandemic.

Other caveats apply. Average pay is exactly that: average. Many workers are pocketing stronger wage gains, particularly those that change companies. And inflation, as measured by the consumer price index, doesn’t reflect an individual’s experience. People can also adjust their consumption based on where prices are heading.

Still, many economists are puzzled by tepid wage growth, given the extent of labour shortages. As of October, Canadian employers were recruiting for nearly a million positions, near a record level of labour demand.

”There’s just too much demand for workers and there’s not enough workers right now,” said Jean-François Perrault, chief economist at Bank of Nova Scotia. “The price of labour should go up.”

Momentum appears to be building. Companies are saying labour shortages have never been more intense, according to another Bank of Canada survey published on Monday. Eighty per cent of businesses are planning to raise wages at a faster rate in the coming year – easily the highest in survey data since 1999.

Wage growth should accelerate in the first half of 2022, although “probably not enough to fully compensate for inflation,” said Avery Shenfeld, chief economist at CIBC Capital Markets. “But the gap might look a little narrower.”

Mr. Shenfeld pointed out that some workers get an annual pay raise that takes effect in January. Also this month, Ontario raised its minimum wage to $15 an hour (from $14.35). Liquor servers in the province will also get the standard minimum – a 20-per-cent hike from the previous rate of $12.55 an hour.

For the Bank of Canada, a wage surge is potential cause for concern. After all, wages and inflation aren’t mutually exclusive. Central bankers want to avoid a wage-price spiral, in which workers seek better wages to compensate for higher inflation, while companies raise prices to compensate for higher wages, creating a vicious cycle.

The Bank of Canada’s recent surveys show inflation and wage pressures are building, which has underscored the view on Bay Street that rate hikes are imminent, whether they start next week or in early March.

“The Bank of Canada’s rate hikes in the coming year or two, coupled with the resolution of some of these supply-chain issues, will bring inflation back down to earth,” Mr. Shenfeld said. “We’re not likely to see a perpetual period in which wages dramatically trail inflation the way they have in the last few months.”

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