With food inflation soaring and the Canadian dollar collapsing, Canadians await critical expectations from the US Federal Reserve

The fact that food prices continue to rise is no surprise to Canadians responsible for grocery shopping. Really, everything Statistics Canada did on Tuesday was a scary increase.

But as they wait for the Bank of Canada to fix 10.8 per cent food inflation – the biggest rise in grocery bills since 1981 – Canadians may want to watch Wednesday’s announcement from the US Federal Reserve more closely.

The Bank of Canada is officially charged with setting Canadian interest rates. And as the Deputy Governor of the Central Bank of Canada, Paul Beaudry, insisted on Tuesday that we follow the latest inflation numbers, the matter still stands.

“We want inflation to go down by 2 percent,” Beaudry told a gathering of students and professors at the University of Waterloo, southwestern Ontario, on Tuesday afternoon. “This is where it has been for a long time. Now it’s going upstairs.”

Pewdry saw some good news in the fact that Canadian inflation continued to fall from its highs. But the fact that price hikes are still “wide-based” — in other words, affecting so many commodities other than food and fuel — was another sign of the danger that inflation expectations were stubbornly planted in Canadians’ minds.

Paul Beaudry, deputy governor of the Bank of Canada, said on Tuesday that Canada will do “whatever it takes” to bring inflation to the 2 percent target range. But with markets falling again, some economists say the US Federal Reserve will have more leverage, even for Canadians. (David Kawai/Bloomberg/Getty Images)

It could take a reasonable two years, he said, to dislodge this kind of inflationary thinking from the perceptions of companies considering how much to raise prices and income earners planning to increase their wage demands. Beaudry said the bank’s approach includes more substantial rate increases, along with a communications strategy, to try to convince rational economic thinkers that inflation will go down.

Beaudry said he hoped “a return to low inflation with as little disruption as possible on the real side of the economy,” but added that the Bank of Canada would do “whatever it takes.” That read, Desjardins managing director and economist Royce Mendez said the bank would accept a recession if necessary to crush price hikes.

While the Bank of Canada rate hike has an impact on Canadians, what the US central bank, known as the Federal Reserve, does is critical to the lives of consumers, homeowners and investors north of the border as well.

According to some economists, what the Federal Reserve does may have a greater impact on Canadians than interest rate changes by Beaudry and his team. Surely anyone with a stock portfolio who watched the markets sink on Tuesday on fears of higher US interest rates would probably agree.

Watch | Grocery bills are rising at the fastest pace in 40 years.

Inflation subsides, but not enough to bring down grocery prices

New figures show that Canada’s inflation rate fell again to seven percent in August, but grocery prices are still at their highest levels in decades.

Marriage is a nuisance

The relationship between Canada’s central bank and the Federal Reserve is a bit like a forced marriage. Borders stretching for nearly 9,000 kilometers, deeply integrated economies, close commercial and banking ties, and currencies that rise and fall together mean it is hard to contemplate divorce. And while it’s not generally a turbulent relationship, it’s not always comfortable — and certainly not a marriage of equality.

Prime Minister Justin Trudeau’s father, Pierre Elliott Trudeau, compared living next door to the United States to sleeping with an elephant.

Pierre Elliott Trudeau, left, when Prime Minister of Canada, appears with then-US President Richard Nixon at the White House in Washington on March 24, 1969. In a speech during the trip, Trudeau compared living next door to the United States to sleeping with an elephant. (The Associated Press)

“No matter how friendly and even temperamental one is, one is moved by every jerk and grunt,” Trudeau Beer said in a speech to the National Press Club of America more than 50 years ago.

When it comes to monetary policy, the same still applies, Pedro Antunes, chief economist at Conference Board Canada, said on Tuesday.

“If the United States gets into a hard landing scenario itself, it’s very difficult for us to avoid that here in Canada,” he said.

Compared to the US, Tuesday’s figures suggest Canadian inflation appears moderate. The latest US data showed core inflation – a statistical measure that strips out the more volatile prices of things like food and fuel – continued to rise. But as Antunes and many others noted, the Canadian core fell on Tuesday.

Will you go alone?

He said this is not a relief to poorer Canadians who spend a disproportionate share of their income on food, but some analysts have pointed out that the Bank of Canada will not have to raise interest rates as quickly or as quickly as it intended.

If so, Pewdrey offered no reassurances to that effect. Economists also know that it is very difficult for the Central Bank of Canada to move away from the Federal Reserve as it raises interest rates.

Less than two weeks ago, Deputy Governor of the Bank of Canada, Caroline Rogers, suggested that a rising Canadian dollar, fueled by energy exports, would serve as a cushion against inflation in Canada. But since then, the Canadian currency has fallen to its lowest level in two years. This makes imports, especially from our largest trading partner – the elephant – more expensive, driving Canadian inflation higher.

Even as Canadian domestic prices begin to decline, many internationally traded commodities, including oil and animal feed, are priced in North American markets. Much of our food comes from American farms, but even products from outside the continent, such as grapes from Peru, are cleared through American ports and priced in US dollars for the US market.

Home for sale in Toronto earlier this summer, when interest rates were lower. While the Bank of Canada sets interest rates, long-term mortgages are guided by bond prices in the US markets. (Don Pettis/CBC)

What you pay for your home is also at least partly “Made in America”. While the rule of thumb is that short-term mortgages in Canada are tied to the Bank of Canada’s overnight rate, long-term rates are based on bond rates set in New York as lenders hedge against further rate increases.

As mentioned, while some economists have expressed optimism that the Bank of Canada can pare back rate increases, anyone who has investments in the stock market or holds long-term bonds has good reason to be excited by the prospect.

US, Canadian stocks and even cryptocurrencies fell sharply on Monday – bitcoin fell below $19,000 – amid fears of what Jerome Powell, chairman of the Federal Reserve, might do the next day.

Of course, as in any marriage, Canadians must accept the good with the bad.

Bank of Canada Governor Teff McClem has said in the past that the only practical way to prevent inflation from repeatedly stealing buyer power from Canadian wage earners is to use rising interest rates to control inflation. But this is difficult when we see a lot of price increases arriving with global imports.

While Canada acting on its own may not have much influence on global prices, if the US Federal Reserve decides to use all its power to control global inflation, Canadians may benefit as well.

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