Economists say that the early signs of wage growth slowing indicate that the Bank of Canada is making progress in its fight against inflation. However, it is unclear whether Canadians will be able to regain the purchasing power they lost during sustained price growth. Brendon Bernard, senior economist with job site Indeed, says that if wage growth cools, inflation needs to come down even faster in order for workers to make up for lost ground. Shelly Kaushik, BMO economist, states that wage growth is just one factor the Bank of Canada is monitoring in its fight against inflation. She notes a slowdown in broader economic activity, which is in line with the bank’s goals to cool inflation pressures.
Statistics Canada reported that the economy remained unchanged in April, with inflation moderating to 3.4% in May. Kaushik says that the target for inflation is around 2%, and ideally, wage growth should match inflation. Wages grew at a rate of 5.1% in May, slightly slower than 5.2% in April when wage growth surpassed inflation. The latest report on payroll employment from Statistics Canada showed stronger wage growth in April, but a decline in job vacancies. This report provides more nuanced data compared to the labor force survey but suggests that demand for labor is cooling as desired by the central bank.
Kaushik warns against easing of wages as the sole measure to bring inflation back to target, as there is still strong demand for goods and services. Indeed has been tracking posted wages on Canadian job ads and has observed a cooling of wage growth to 4% in May 2023, down from 5.3% in August of the previous year. Low- and mid-paying job postings have seen faster wage growth in areas with tight hiring conditions. However, total Canadian job postings have also slowed. It is a hopeful sign for what Bernard calls “immaculate disinflation,” where inflation decreases but the labor market remains strong.
The Canadian Federation of Independent Business has also noticed easing wage pressures, while a report from the Bank of Canada found that businesses’ expectations for wage and price increases are cooling. The data so far suggests a potential rate hike from the central bank in July, but it is not yet certain. There is concern among economists that sustained higher wage growth may drive inflation as businesses raise prices to cover rising labor costs. All eyes will be on the labor force survey as the central bank determines its July decision. Despite signs of softening, the unemployment rate remains historically low, and economic momentum may be too strong for the central bank to change course just yet.
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