Slowing inflation does not mean you get your spending power back

Investors in financial markets were ecstatic when the latest inflation data seemed to show that rising prices in the United States had peaked.

While business journalists often imply that increasing share values are a universally good omen, it is not clear that many Canadian working people, especially those who don’t have the cash to invest in stocks and bonds, are ready to breathe a sigh of relief.

As we wait for Canada’s own inflation rate out Tuesday — also expected by economists to be down from its high — there may be good reasons to think that even for market traders, last week’s euphoria may be premature.

Irrational rebound? 

Some financial commentators were calling last week’s jump in stocks a bear market rally and an irrational rebound.

And the Canadians I spoke to representing labour, academia and private sector business all had strong reservations about the idea that declining inflation represents a panacea that will make everyone feel good again.

A cooling property market, where many Canadians have put their savings, shows few signs of reversing its latest downward trend.

The lingering effects of a decline in spending power may never be reversed.

And a slump in consumption because of falling wages and wealth is likely to hit Canadian businesses hard and may instead be a signal of more economic trouble ahead.

“Companies which were able to increase [prices] and pass on that higher cost to consumers would be benefiting, at least in the short term,” said Gurupdesh Pandher, an economist and professor of finance at the Odette School of Business at Ontario’s University of Windsor.

Pandher understands why markets reacted positively to signs of falling inflation, because it could mean central banks might not need to raise interest rates as much or as fast. But he worries the past year’s soaring price rises have already done their damage.

The problem, he said, is that inflation is cumulative — like compound interest in reverse. A decline in the rate of inflation does not get your spending power back.

Workers can never catch up

As an example, Pandher points to the employee wage contract at his own university, which he describes as a microcosm of the situation across the country. Signed just last year, the contract provides for increases of one per cent a year for three years, and slightly more in the fourth year.

Even when inflation was rising at the central bank’s target range near two per cent, an increase of one per cent would mean real wages — where real means after taking inflation into account — were actually slowly declining, with the result that employee purchasing power was constantly shrinking.

But with Canadian inflation in the eight per cent range, the decline is much sharper; it means real wages for those employees declined by seven per cent this year…