Hot Canada inflation not yet causing a wage spiral – budget watchdog

OTTAWA (Reuters) – Prices in Canada are rising at their quickest pace in 31 years, but that is not yet feeding in to a wage spiral, Canada’s budgetary watchdog said on Tuesday, with inflation still expected to return to target in coming years.

Canadian consumers and businesses expect inflation to creep up in the short term, but longer-term expectations remain anchored, said Yves Giroux, Canada’s Parliamentary Budget Officer (PBO), in a statement.

“Financial market participants largely do not see the current high-inflation environment as permanent,” he said. “To date, wage settlements data also show little indication of higher observed and expected inflation feeding into wage negotiations in the unionized sector.”

Inflation in Canada hit 6.8% in April, its highest level since January 1991, with food prices rising at their fastest clip since the early 1980s. Russia’s invasion of Ukraine has helped fuel price increases around the world.

A wage spiral – where fast-rising living costs prompt workers to demand higher wages, leading businesses to hike their prices to pass costs on to consumers – is a key concern for policy makers.

But so far, wage growth has not taken off in Canada. Average hourly wages in April were up just 3.4%, according to official data, well short of inflation.

The PBO found wages have risen 8.6% since the onset of the pandemic, with inflation over that period a touch higher at 9.0%.

In Ottawa, leaders from the Conservative and the New Democratic parties called on Prime Minister Justin Trudeau’s Liberal government to take measures to reduce the impact of inflation.

The official opposition Conservatives are calling for a temporary gas tax holiday and an end to fertilizer tariffs, while the New Democrats propose higher taxes on corporate “excess profits.”

(Reporting by Julie Gordon and Ismail Shakil in Ottawa; Editing by Matthew Lewis)