The federal package aimed at helping low-income earners weather inflation announced on Sept. 13 is likely to result in driving up inflation, says a Scotiabank economist.
“Any belief that it will ease inflationary pressures must have studied different economics textbooks.”
The measures include doubling Goods and Services Tax (GST) rebate payments for six months, implementing the first phase of a national dental care program, and providing a one-time $500 rental allowance payment to low-income Canadians who pay at least 30 percent of their income on rent.
In his analysis, Holt cited data showing how much consumer spending increased on past occasions when the government increased supports. He says it’s likely some of those billions of dollars will be spent by households, though the amount is uncertain.
“This is what happened when the child benefit payments were sharply increased in years past with no strings attached to what was done with the proceeds as a surge in sales then gave way to a demand vacuum,” wrote Holt.
US DataIn his bulletin, Holt also reacted to the latest U.S. inflation data that sent stocks and bonds stumbling on Sept. 13, with the Dow Jones dropping 900 points.
While the U.S. Consumer Price Index (CPI) for August (8.3 percent) was lower than July (8.5 percent), it was higher than expected after aggressive rate hikes by the Federal Reserve.
The measure of core CPI, which excludes energy and food prices, rose to 6.3 percent year-over-year after hitting 5.9 percent in June and July.
“There is zero evidence that the pressures are durably cooling. That remains wishful thinking absent empirical supports,” wrote Holt.
He also sent a warning that food prices would continue to soar as key producing countries have been hit by droughts.
Holt said the latest U.S. inflation data and Ottawa's new relief announcement “suggests that the BoC [Bank of Canada] is likely to be dragged along by the Fed with domestic fiscal stimulus reinforcing the likelihood that the policy rate breaches 4% by December if not October.”