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Inflation fear rises with wage pressure

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Inflation fear rises with wage pressure

Postby NC » Tue Aug 07, 2007 10:57 am

This is interesting as it brings to light the balancing act we live in every day.
Inflation fear rises with wage pressure

Comment; Additional fuel for Bank Of Canada to increase rates

Jacqueline Thorpe
Financial Post

Tuesday, August 07, 2007

The last line in the sand in the defence against rising inflation in Canada appears to be crumbling.

After falling from a peak in late 2005, wages pressures have started to pick up and if the brewing labour strife in such hot spots as Vancouver and Fort McMurray are anything to go by, they could be about to take a leap.
Vancouver city workers have been in the spotlight recently, with 5,500 inside and outside workers on strike. The Canadian Union of Public Employees has tabled an opening wage demand of 21% over five years-- an average of 4.2% a year. Nearby Richmond and Surrey workers recently clinched increases of 17.5% over five years, an average of 3.5% a year.

In Alberta, 25,000 electricians, pipefitters, millwrights, plumbers and refigeration mechanics in the oilpatch are in intense negotiations for new contracts and another 5,000 could join them on strike by mid-August if talks break down. Electricians recently rejected a four-year deal offering 5%, 6.5%, 6.5% and 6.5%.

The precedent for robust increases was recently set at Sun-cor Energy Inc., where 2,100 unionized won annual gains of 7%, 6% and 6% over three years, plus a $4,000 lump sum payment, up from a previous contract averaging 3.2% per year and no lump sum.

Meanwhile in the booming Alberta construction sector, wage settlements have gravitated toward the 7% to 8% range over the past two years, up from previous gains of 3% to 5%, said Stephen Kushner, president of Merit Contractors Association, representing non-union employers in the province. About 160,000 of the 200,000 construction workers in Alberta are open shop.

As with every economic statistic in Canada these days, these centres of manic activity in the West are fuelling nationwide wages higher.

There is little chance an Ontario manufacturing employee is getting a 6% raise but even in that slow-growth province average hourly earning increases spiked above 3% in June after hovering around 2% in the spring.

Nationwide, wages are running at a 3.5% pace, up from 2.4% in the first quarter, and well above the core rate of inflation at 2.2%.

And while it is true that nonunion workers in Alberta may be winning robust gains, across the country, union settlements far outstrip non-union settlements at about 5% versus 3%, notes Derek Burleton, senior economist at Toronto-Dominion Bank.

In many cases in the Western provinces, workers are struggling to keep up with surging house prices. Paramedics in Calgary for instance, are seeking a 30% wage gain over three years -- the city is offering 12% -- in part to help cover annual house price increases of over the past year.
"We can all talk about core inflation and the niceties of that, but for the average person in Alberta, the overall inflation rate is 6%," said Douglas Porter, deputy chief economist at BMO Capital Markets. "That's what they're dealing with in the real world and it's perfectly understandable they want their piece of the boom."

Economists are surprised, in fact, that it has taken this long in Canada's employment boom for wage pressures to start cooking. The unemployment rate is running at 3% to 4% in the four western provinces, after all.

Craig Wright, chief economist at Royal Bank of Canada, said there may have been several reasons for this. Workers in hot sectors may have been receiving non-traditional increases such as signing bonuses, housing relocation assistance or help with tuition that may not have shown up in wage measures.

Also, the lower the unemployment rate goes and the deeper employers have to dig for skills, the more comfortable workers are in agitating for more significant increases.

But these are exactly the kinds of developments the Bank of Canada does not like: a possible house-wage spiral and rising wage expectations.
"It does suggest the overall average is going to continue to creep higher, and with that runs the risk that inflation expectations start to creep higher, and that's the kind of story that gets the Bank of Canada a bit nervous," Mr. Wright said.

Rising wage pressure gives the Bank of Canada one more reason to hike interest rates to 4.75% in September from 4.50% -- along with a rise in core inflation to 2.5% from 2.1% late last year -- that is unless financial markets don't completely fall apart by then or the loonie doesn't go on another tear.

© National Post 2007

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