Economy Facing Dual Threat—Slow Growth, High Inflation, says Bank of Canada
“I am not using the word stagflation,” said Global Insight managing director Dale Orr. “But it’s a very awkward trend when you have weak output and yet you have high inflation.” He said traditionally the term stagflation—a word coined to reflect stagnant growth and price inflation—implies a prolonged condition in the economy, whereas the [central] bank’s statement suggests the problem may only last a few months. Inflation had been a dead issue in Canada for months. ... But now that the central bank, and particularly record oil prices, has put inflation back on the table, future policy decisions have been made more problematic. ... Signs that Canada’s economy continues to slow have been steadily building over the past month, from the recent report that gross domestic product shrank 0.3 percent in the first quarter, to last week’s employment release showing job creation stalled in May, with full-time employment actually tumbling by 32,000. ... “Canada’s job market has clearly weakened over the past two months because of the high Canadian dollar and its effect on the manufacturing and forestry sectors,” [Canadian Labour Congress head Ken Georgetti] said. “Jobs are getting very hard to find for those entering the labour force and for those who are losing their current jobs.”
a. Draw a graph to illustrate and explain how high oil prices might create cost-push inflation in Canada.
b. Explain why Orr refused to use the label “stagflation” to describe the situation.
c. Draw a graph to illustrate and explain how high oil prices could lead to a cost-push inflation spiral.
d. Explain why this situation makes the central bank’s future monetary policy decisions “more problematic.”
e. Explain and use a graph to illustrate Georgetti’s claims about how the “high Canadian dollar” has weakened the job market. How might this also help to reduce inflationary pressure?