Bank of Canada Calls for Wage Restraint Amid Rampant Inflation

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Jul 10, 2023
Bank of Canada Urges Wage Restraint in Response to Soaring Inflation


The Bank of Canada is advocating for wage restraint to combat rising inflationary pressures in the country. Charles St-Arnaud, Chief Economist at Alberta Central, has expressed concerns about the significant increase in hourly wage growth, with permanent workers experiencing a rise of over 5%, equivalent to an annualized increase of about 10% in just three months. The central bank is considering two possible strategies to address this situation: urging workers to spread their wage hikes over a longer period or potentially raising its policy rate to slow down the economy and curb wage gains. If wage growth continues to accelerate and inflationary pressures persist, the bank may resort to policy rate hikes in the future to tackle the issue.

Higher wages can lead to inflation through two channels: supply and demand. While increased wages have the potential to inflate the economy by boosting demand, per capita spending remains relatively restrained, suggesting that spending is not rising in line with income gains. The primary concern for the Bank of Canada is the supply shock caused by rapid wage growth without corresponding productivity improvements or adjustments for the cost of living. This situation increases business costs, which are often passed on to consumers through price hikes.

The Bank of Canada’s strategy of promoting wage restraint is aimed at preventing an inflationary cycle. However, there is a risk that this monetary policy could become overly restrictive. A significant increase in the policy rate has already led to rising insolvencies and increased household indebtedness, causing financial difficulties for many households. This could potentially result in significant job losses and a severe economic downturn, posing risks to financial stability and the potential for a deep recession.

In July, the bank predicted that CPI inflation would remain around 3% for the next year before gradually declining to 2% in the middle of 2025. Meanwhile, Bitcoin is experiencing record-high prices in countries facing soaring inflation rates, such as Argentina, Egypt, Laos, and Lebanon. This surge in Bitcoin’s value reflects its appeal as a store of value during economic turmoil and is drawing global attention to its performance in these countries. Michael Saylor, the executive chairman at MicroStrategy, has stated that Bitcoin is the best solution to protect wealth from the risks associated with inflation and political uncertainties worldwide.

Overall, the Bank of Canada is urging wage restraint to counter rising inflationary pressures. While higher wages can lead to inflation through increased demand and supply shocks, the central bank is concerned about the latter. By encouraging wage restraint or potentially raising the policy rate, the bank hopes to prevent an inflationary cycle. However, there is a risk that overly restrictive monetary policy could lead to financial instability, job losses, and an economic downturn. Meanwhile, Bitcoin is gaining traction as a store of value in inflationary economies..


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