February 25, 2007 Economic Update
Last week was the week for inflation related data for both U.S and
Canada . In
Canada , falling energy prices helped reduce total inflation down from 1.6% to 1.2%. Meanwhile, core inflation which excludes price of energy and food rose slightly from 2% to 2.1% in
This was largely due to higher clothing prices and travel services cost in
Canada and U.S has eased slightly in recent months. Core in
Canada is around the Bank of Canada’s 2% target meaning the bank is more likely to stay on the side lines in 2007, while in U.S the 2.6% inflation is more out of their target of 2% to 2.5%.
As pace of increase in home prices cooled down in late 2006, this helped slow the core inflation. This trend is likely to continue as home prices are expected to cool further in the months ahead. So the more balanced housing market is expected to keep inflation down. Last week I mentioned that the reason Bank of Canada didn’t reduce rates was because even though economy has slowed down, productivity has also slowed so if they decreased the rate it would be inflationary. The bank was wondering if employment is so high why is productivity so low. Normally if you have high employment, you have high productivity. So they asked the statistic
Canada to explain the puzzle. So, a few days ago statistics
Canada came out with an explanation. The main reason is the shift to mining which is a relatively less productive sector. For example, in 2006 output per hour worked declined by 10% in the resource sector, which stripped a full percentage point from economic productivity. Weak productivity growth has also been noted in the manufacturing sector, which has faced many challenges due to our high dollar. Also labour shortage, especially in
Alberta , have also contributed to less productivity as lower educated and both younger and older workers have come to the labor market. An encouraging factor is that many firms have invested in new equipment, which may eventually increase productivity.
Mina Mohtadi, MBA
Manager, Residential Mortgages
T: 604-809-3033
F: 604-926-3166