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In his speech last week, the head of the Canadian central bank, Stephen Poloz, said that the growth in business circles of fears about the weakening connection between economic growth and inflation looks too far-fetched. In some leading world economies, the inflationary level is far from expected, and this forces some representatives of the political establishment and experts to voice doubts that regulators are able to keep inflation under control and manage expectations about its prospects.
Poloz spoke in defense of central banks, noting that they are well aware of the work of inflationary mechanisms. He also noted that the statements about changing the relationship between GDP growth and inflation are not justified against the backdrop of such a moment as ever greater integration in the global economy and a gradual transition to a digital economy.
Canadian inflation showed a slowdown in the first half of the year after the January surge to 2.1%. At the same time, there was an active decrease in unused capacities in the country, and the growth of its economy was the fastest among the G7 participants. In recent years, there has been an increase in price pressure, and in the early autumn, the annual inflation rate was 1.6%.
Poloz noted that the main reason for the inflation slowdown may be the cost of food, which is below the average level, as well as the decision to lower the price of light for citizens in Ontario. It was also noted that the price level is negatively affected by globalization and the ever increasing use of digital technologies in all spheres of life.
Poloz was one of the participants in the group that created the inflation targeting algorithm in the late 1980s, when the regulator decided to regulate the key rate so that the inflationary level remained in the range of 1% -3%. The algorithm was somewhat supplemented last year - the regulator "put into operation" three new inflation characteristics in order to have a more comprehensive picture of the inflationary background.
Central banks that use inflation targeting are usually adherents of lower key rates. Then prices are easier to grow in the period of demand reduction, and when there is a possibility that inflation may be higher than the established limit against the backdrop of a sharp increase in costs, the rates go up.
Inflationary acceleration can favorably affect the economy, for example, as an incentive for more active acquisition of goods and services, as the prices for them can theoretically be even higher. In addition, inflationary acceleration can contribute to the fact that enterprises will begin to increase their salaries to their employees, and this, in turn, will give citizens more opportunities to invest their savings.