We are unfairly asking the central bank to cure what ails Canada: Manulife's chief economist
More than a year into its interest rate hiking cycle, the Bank of Canada has set its sights on “corporate pricing behaviour” in its battle with inflation – a shift economists say is noteworthy, though it’s not yet clear how the bank is viewing the role of corporate profits in today’s elevated consumer prices.
The reference was slipped into the central bank’s Wednesday statement on its decision to raise interest rates a quarter of a percentage point to 4.75 per cent, listing it as one of four key areas of interest in its bid to bring inflation down to two per cent.
“Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation,” their statement read. “In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target.”
Economist Jim Stanford said he was pleased to see the reference to corporate pricing, as it suggests the central bank is casting a wider net in its assessment of inflation’s causes beyond its past focus on the labour market.
“I think it indicates that the Bank of Canada has recognized that corporate pricing and profit strategies have played a role in our current inflationary upsurge,” Stanford, director at the Centre for Future Work, told BNNBloomberg.ca in a telephone interview.
“This is belated, but welcome recognition that inflation can arise from profits, not just from wages.”
Stanford authored a report last year that argued profits in sectors including oil and gas, mining, real estate, grocery and banking drove the bulk of inflation in Canada 2022.
He noted that inflation has dropped significantly since last year, as have corporate profits, while the labour market has remained steady – a pattern he said gives weight to his view that profits have driven more of the current inflation cycle than wages.
However, he said the central bank’s reference to corporate pricing doesn’t mean much without a shift in its policy approach.
“It’s cold comfort in a way that the bank has acknowledged profits might be the problem, but they're still using high interest rates, which is aimed clearly at work and wages, to solve the problem,” he said.
Stanford said it appears that the Bank of Canada is in the early stages of assessing the role of corporations in inflation, noting that the word “profits” is absent from their statement, though “at least they're opening the door to a discussion of those issues.”
Charles St-Arnaud, chief economist at Alberta Central and a former economist with the Bank of Canada, said he found the new reference “corporate pricing strategies” interesting.
He interpreted the line as an indication that the central bank is assessing “whether or not higher costs are being absorbed by corporations or being passed right to consumers” amid the high inflation environment, and how quickly that is happening.
However, St-Arnaud cautioned that the central bank doesn’t appear to be taking a clear stance on what it thinks is happening with corporate pricing and inflation, nor is it explicitly acknowledging concerns about possible “price gouging” that have arisen as Canadians contend with higher prices in grocery aisles.
“I think some people might see that as, ‘Oh, is the bank saying implicitly that they're seeing price gouging from corporations?’ I don't think that's what they're saying,” St-Arnaud said in a telephone interview. “I think it's more in terms of general pricing behaviour.”
It’s possible that concerns about “price gouging” or “greedflation” are a part of the bank’s assessment though, St-Arnaud added.
“They’re taking notes, that could be an issue, but I think they’re more looking into how quickly corporations are passing higher cost to their customers,” he said.
Stanford also noted that discussions about the correlation between corporate profits and inflation have become more mainstream around the world.
The European Central Bank has recently highlighted surging profits as a major source of inflation, and a report out this week from the Organization for Economic Cooperation and Development also referenced the phenomenon as a source of persistent inflation.
Stanford contended that the Bank of Canada is now wading into that growing area of interest as policymakers contend with sticker-than-expected inflation.
“There's a flowering of research onto this question of profits and inflation, and I think that's part of what spurred the bank to look at this,” he said.
In an emailed statement to BNNBloomberg.ca, the Bank of Canada said it has “identified more normal corporate pricing behaviour as one of the things that needs to happen for overall inflation to get back to its two per cent target.”
Bank of Canada Governor Tiff Macklem commented last month on corporate pricing as an area the bank is watching “very closely,” noting that the phenomenon is “normalizing” amid falling commodity prices and supply chain improvements.
He also added that there are a range of issues at play including competition concerns – which the Competition Bureau is currently probing in the grocery sector.