This past week, both the U.S. Bureau of Labor Statistics and Statistics Canada indicated that the general inflation rate trend is gradually going down. As a result, the Bank of Canada reduced its central bank rate by a quarter of a point. However, such an interest rate reduction will not immediately affect mortgage and loan rates offered by the banks and other financial institutions. Also, for the average American and Canadian, the cost of living is still high as demonstrated by food prices and the costs of homes or rents in urban centers. These costs do not necessarily have as much to do with inflation as they do with regards to other domestic issues and foreign markets. For this reason, there is little likelihood that food costs, rents and housing costs will decline in the near future. There is a general lack of affordable housing across both countries and the impact of climate change is already being felt in the agriculture sector. We will have to wait to see what the U.S. Federal Reserve will do with respect to the current central bank rate. With inflation sticking at a level above their 2% target, they’re apparently downgrading their outlook for interest rate cuts.
Politically, this situation does not bear well for the governing parties in both countries. The economy, and especially inflation and high interest rates, is still the priority concern for most voters. Remember the old adage: “It’s the economy stupid”. In light of the coming American elections next November, the possibility of major economic improvements is increasingly unlikely every day. The same can be said for the Canada’s federal government and its ruling Liberal Party under Justin Trudeau, which could call an election next year.
In general, the current economy has also particularly hurt younger voters, such as Generation Z and the Millennials. They have been especially affected by the lack of affordable housing and the continuing difficulties surrounding the cost of living and failure of wages to keep up with rising costs. Their votes in coming elections will be very important and may very well determine which parties are successful in their bids to govern.
Both the Federal Reserve and Bank of Canada have admitted that maintaining very low interest rates over the last decade has contributed to the current economic dilemma. For example, it created a major imbalance in how the mortgage markets operate, encouraging many people to overspend and helping to cause incredible rising costs in housing. In addition, new housing developments could not keep up with the created demand. As a result of the pandemic, there was also a substantial increase in construction costs due to the resulting scarcity of materials. It has taken some time for the markets to rebound and for supply chains to catch up to the subsequent demands.
While the markets did well during the pandemic and continue to do well, this primarily benefited the large corporate sector and shareholders, but not average Americans and Canadians. Many of them suffered wage and job losses during the pandemic, and many have not recuperated those losses after the pandemic. The pandemic significantly altered our economies and our lives. The consequences will be around for years to come. Just look at subsequent changes to our labour markets.
Yes, it would appear that the inflation rate is slowly on the way down. However, for the existing political parties it may be too little and too late. For the average person, the damage has already been done, resulting in a great deal of anger, frustration and increasing division in political views. There is little doubt that both the Federal Reserve and Bank of Canada will continue to be cautious in how they handle the central bank rates. Fearing any potential new inflationary pressures on the economy, don’t expect any major changes in the near future.
FROLITICKS 