An unemployment rate of 8% may be the new normal in Canada, creating difficult choices for the Bank of Canada amid signs of accelerating inflation, according to a report Tuesday from Moody's Analytics.
The report points out that Canada's jobless rate has declined "only slightly" in 2010 -- to 7.9% from its peak of 8.7% in August 2009 -- even though total employment has returned to pre-recession levels.
Yet, despite economic growth slowing to a glacial one per cent, as Statistics Canada reported Tuesday, inflationary pressures are starting to surface, said Moody's economist Mark Hopkins, citing the recent surge in core inflation to 1.8% and above-consensus growth in prices for industrial and raw materials this October.
That combination of high unemployment, slow growth and rising inflation all add up to the dangerous mix known as stagflation, and makes life difficult for policymakers who must raise interest rates to contain inflation, but do so at the risk of squelching already weak growth and driving unemployment higher.
That is quickly where Bank of Canada governor Mark Carney is finding himself now that government leaders have shifted focus from stimulus to deficit reduction, leaving the bank responsible for economic recovery, said Hopkins.
"With the global outlook uncertain, bringing the jobless rate down further will require continued commitment by policymakers.
"Yet it is less clear," Hopkins says, "that Ottawa can sustain policy accommodation through 2011," as rising inflation pressures the bank to control costs through higher interest rates.
Hopkins also cites growth to levels not seen since May 2003 in what is referred to as the "misery index" as evidence of the growing conundrum Carney finds himself in.
The index, derived by adding the unemployment rate to the inflation rate, assumes that a higher jobless rate and rising inflation create economic and social costs for a country.
