MNI: Trudeau Privy Advisers Studied Sticky CPI, Higher Rates

Canadian Prime Minister Justin Trudeau’s top civil service advisers have been studying the risk of persistent inflation and a higher-interest rate regime as companies rework global supply chains, according to a memo obtained by MNI. 

Privy Council Clerk John Hannaford was told by staff to consider asking a visiting economist about “potential implications of sticky inflation and a new economic paradigm under higher interest rates” according to the memo. The document was also copied to Deputy Clerk Christiane Fox.

The briefing was prepared last February before a meeting with Bill Robson of the CD Howe Institute, which runs shadow councils on monetary policy and economic cycles. It was disclosed earlier this week after a freedom of information request that MNI made in April. (See: MNI: Canada Studied Vulnerability To Fiscal Risk Premium) 

Hannaford was also asked to tell Robson the government was interested in research on “the re-wiring of the global supply chains that favour supply chain security over lowest production costs.” Other suggested questions included whether record immigration should be re-calibrated, weak productivity and the country’s tight supply of housing. (See: MNI: Canada Job Market Seen Reheating As Migrants Leave- CFIB)

EXTENDED ABOVE-TARGET INFLATION?

The memo was prescient in noting that inflation had peaked in the short term but questions remained about the future path. Canada’s CPI went from 3.4% in December 2023 to 2% by August 2024. The latest inflation report showed a 1.9% headline pace but core indexes above 2%, leading investors to pare bets the Bank of Canada will cut rates again next month. The central bank targets inflation in the middle of a 1% to 3% band. (See: MNI INTERVIEW2:Macklem Sees Time To React To Neutral Rate Rise)

The government will likely have continued interest in tracking inflation trends, the memo said. Such topics include “potential implications of inflation staying above the target for an extended period” and “how the most vulnerable are impacted by current inflationary pressures.” 

Trudeau is stepping down next month amid criticism of his economic management, though Privy Council officials like Hannaford are nonpartisan government staff who usually remain through changes of government. 

Mark Carney, the former BOC governor who's leading the race to succeed Trudeau, on Wednesday pledged spending cuts funding middle-class tax relief to ease the cost of living. The governing Liberals could be forced into an election this spring where Conservatives led by Pierre Poilievre have made inflation a central issue. 

Excerpt of memo: