MNI INTERVIEW: BOC Already Faces Wage-Driven Inflation - CFIB

Companies are already bidding up wages in response to rapid inflation, says a top economist from the business group that hosted BOC Governor Tiff Macklem last month when he argued firms should stick with modest salary decisions.

“We have three times as many firms now planning on aggressive wage hikes, compared to say what we had before the pandemic, and even with that we still have significant labor shortages,” said Andreea Bourgeois of the Canadian Federation of Independent Business. “When we have such a high share of businesses planning very major wage increases,” she said, then wage-driven inflation “is already part of that story” around broader inflation.

Companies have never been so worried about pay demands with a record 65.3% of managers calling them an obstacle. More importantly to Bourgeois is that figure from the CFIB's monthly survey of small- and medium-sized firms has climbed for five straight months, a shift from modest wage concerns before the Covid pandemic.

SLOW ACTING RELIEF

Beyond regular salaries, payroll taxes for public pensions and provincial minimum wages have climbed, she said. The pandemic has driven up other labor costs such as governments requiring more paid sick days and further leaves of absence. With record job vacancies, companies may also be driving up wages in an almost impossible effort to find workers with the right skills, something Bourgeois said can't be fixed by the Bank of Canada.

“I don’t think they are missing the mark, and I don’t think they will solve everything,” she said, adding it may be difficult for the BOC to make big progress over the next six months. “Their policy will work and I think they will put a stop to inflation.”

Governor Macklem has lifted his overnight interest rate this year from a record low 0.25% to 2.5% and says he must go further with inflation set to exceed his 2% target for a long time. Macklem told CFIB members last month that "as a business, don't plan on the current rate of inflation staying. Don't build that into longer term contracts." Another government labor market adviser says while a wage-price spiral is unlikely, higher rates put the economy at risk of recession. (See: Canada Faces Recession, Not Wage Spiral-Adviser)

About 16% of respondents chose the highest possible wage increase in the CFIB questionnaire, a hike of at least 6%, and the group may need to further refine that category soon, Bourgeois said. Around 5% of respondents picked the top wage increase answer before the pandemic.

UNCOMFORTABLE BACKDROP

The CFIB data is some of the richest and most timely on the status of companies in Canada, and earlier this year it showed firms predicting record gains in wages and prices. While those measures slipped in the last few months, including after the BOC's 50bp rate hike on June 1, Bourgeois said that reflects some firms who have already granted major pay raises for this year. Other companies expecting smaller wage gains lately may have shifted to using less labor in production, she said.

Wage and price expectations for firms remain elevated at around 4% and 3%, respectively, another sign it could take time to cool down the economy, she suggested.

“The Bank of Canada’s policies will have an impact and we will see inflation will go down and we will see price expectations go down somewhat." she said. "I don’t think we will see within the next six months what we are used to seeing in Canada, but they probably aren’t going to stay around the high levels of around 4%.”

Bourgeois said Canada's recent price jumps recalled her childhood in eastern Europe where bread costs could double in an instant and one store started running out before she could return with more money. While not using the term wage-price spiral herself for the current situation, Bourgeois said the wage backdrop remains uncomfortable. “What’s worrisome is to see that they are trending upwards quite aggressively and constantly."