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As food inflation rises and loonie falls, Canadians await key outlook from US FedTAZAA News

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That food prices continue to rise should come as no surprise to Canadians responsible for grocery shopping. Indeed, Tuesday’s Statistics Canada data put an alarming number on growth.

But as they wait for the Bank of Canada to address the issue of 10.8 percent food inflation — the biggest increase in grocery bills since 1981 — Canadians may want to keep an eye on Wednesday’s announcement from the US Federal Reserve.

The Bank of Canada is charged with setting official Canadian interest rates. And the Canadian central bank’s deputy governor, Paul Beaudry, insisted on Tuesday following the latest inflation numbers that it was still on the case.

“We want to get inflation down to two percent,” Beaudry told a gathering of students and professors at the University of Waterloo in southwestern Ontario on Tuesday afternoon. “It’s been there for a long time. Now it’s running on top.”

Beaudry saw some good news in Canadian inflation continuing to decline from its peak. But price increases remain “broad-based” — in other words, affecting many goods beyond food and fuel — another danger sign that inflationary expectations are stubbornly planted in the minds of Canadians.

Bank of Canada Deputy Governor Paul Beaudry said on Tuesday that Canada would do ‘whatever it takes’ to reduce inflation to its two per cent target range. But with markets falling again, some economists say the US Fed will have more leverage for Canadians as well. (David Kawai/Bloomberg/Getty Images)

He said it could take a reasonable two years to remove that kind of inflationary thinking from the minds of businesses when it comes to how much to raise prices and when employers plan to raise their wage demands. Beaudry said the Bank’s approach to convincing rational economic thinkers that inflation is coming down is to combine even bigger interest rate hikes with a communications strategy.

Beaudry said he hoped to “return to low inflation with as little disruption as possible to the real side of the economy,” but said the Bank of Canada would “take anything.” Royce Mendes, managing director and economist at Desjardins, said the bank would accept a recession if necessary to curb rising prices.

While Bank of Canada rate hikes affect Canadians, what the US central bank, known as the Fed, does is critical to the lives of consumers, homeowners and investors north of the border.

According to some economists, what the Fed does will have a bigger impact on Canadians than the interest rate changes made by Beaudry and his team. Anyone with a stock portfolio who saw markets fall on Tuesday on fears of rising US interest rates would surely agree.

Watch | Fastest rising grocery bills in 40 years:

Inflation will decrease, but not enough to lower grocery prices

Canada’s inflation rate fell back to seven per cent in August, new numbers show, but grocery prices are still the highest in decades.

An uneasy marriage

The relationship between the Central Bank of Canada and the Fed is like a forced marriage. With a border that spans nearly 9,000 kilometers, deeply integrated economies, close trade and banking ties, and currencies that rise and fall, divorce is hard to imagine. And while it’s not usually a troubled relationship, it’s not always a comfortable one — and certainly not an egalitarian marriage.

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

Pierre Elliott Trudeau, left, as Prime Minister of Canada, is shown with then US President Richard Nixon at the White House in Washington on 24 March 1969. In a speech during the visit, Trudeau compared living next to the US to sleeping. with an elephant. (The Associated Press)

Trudeau Pere said in a speech at the US National Press Club 50 years ago, “No matter how friendly and restrained, one is affected by every twitch and whisper.”

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

“If the US gets into a hard landing scenario, it’s going to be very difficult for us in Canada to avoid that,” he said.

Compared to the US, Tuesday’s figures suggest Canada’s inflation moderated. The most recent US data showed core inflation — a statistical measure that strips out highly volatile prices for things like food and fuel — continued to rise. But as Antunes and many others noted, the Canadian core went down on Tuesday.

Going alone?

Some analysts have suggested that the Bank of Canada may not need to raise rates as much or as quickly as it wants, although that is not very comfortable for poor Canadians who spend a disproportionate share of their income on food.

If so, Beaudry makes no guarantees to that effect. Economists know that even moving too far from the Fed will be difficult as Canada’s central bank raises interest rates.

Less than two weeks ago, the Bank of Canada’s senior deputy governor, Caroline Rogers, suggested that the loonie, boosted by energy exports, was acting as a cushion against inflation in Canada. But since then, the Canadian currency has fallen to a two-year low. This would make imports, especially from our largest trading partner – elephants – more expensive, pushing up Canadian inflation.

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

Earlier this summer, a house was for sale in Toronto when interest rates were low. The Bank of Canada sets rates, long-term mortgages are guided by bond prices in the US markets. (Dan Pittis/CBC)

What you pay for in your home is also at least partially ‘Made in America.’ While the rule of thumb in Canada is for short-term mortgages to be pegged to the Bank of Canada overnight rate, long-term interest rates are based on bond prices set in New York, protecting lenders against further rate increases.

And as mentioned, while some economists have expressed optimism that the Bank of Canada will reduce interest rate hikes, there is little reason for anyone investing in the stock market or holding long-term bonds to be thrilled by the prospect.

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

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

Bank of Canada Governor Tiff Macklem previously said the only practical way to prevent inflation from repeatedly stealing purchasing power from Canadian wage earners is to use rising interest rates to bring inflation under control. But it’s difficult when many of the price increases we see come from global imports.

Canada alone may not have much of an impact on world prices, but if the US Federal Reserve decides to use its power to reduce global inflation, Canadians could also benefit.

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