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Friday, March 19, 2010

And now, Inflation

Just a week ago, analysts were expressing concern about the rising dollar and inproved job situation, and hoping for an interest rate increase much sooner than September, Mark Carney's hoped-for date of moving from zero. Those analysts are worried that, while we all want the economy to recover from recession (and for jobs to appear in greater numbers), if we overshoot, we can move into an inflationary spiral.

Well, this morning, StatsCan reported 2.1% inflation for February, much higher than expected. The Bank of Canada really only has one lever to pull, and so I expect interest rates must start upward sooner than Carney wanted. If the supply of essentially free money in the economy isn't choked off, too many dollars will continue to compete for too few goods and services, and inflation goes much higher than anyone wants.

The only good news in this situation is that after Carney's extensive promises of holding the rate through the summer, it won't take much of an interest rate hike to have an overcompensating psychological effect. This good news is its own bad news as well, though - the recovery is still fragile enough that even a shot across the bow could shatter it. What's a Governor of the Bank of Canada to do?

I think, in having to choose between a little medicine now or a lot later, the correct choice is obvious.

Either way, we're rapidly reaching the end of fire sale interest rates. This will have an obvious cooling effect on the housing market. And since I think the housing market is already hyper-inflated (Follow the full story here, here, here, here, and here), this is another reason why a little medicine now beats requiring a lot later.

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