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Inflation Fights Inflation in BOE's Strategy for U.K. Economy – Financial Post

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Inflation could become an unlikely ally in the Bank of England’s fight against rising prices.

As paradoxical as it sounds, rocketing energy and commodity prices may be doing the work for monetary policy. Those forces will slow growth, and in the U.K. central bank’s estimation, help contain upward pressure on prices in the longer term.

That is the argument policy makers led by Governor Andrew Bailey have been making for several weeks now. It’s one reason why the BOE took a sharp increase in interest rates off the table and moderated its guidance about the path of policy at the March vote, when it raised borrowing costs by a quarter point to 0.75%.

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Minutes to the meeting confirm a line of thinking that’s emerged in recent weeks, backed up by economists and research groups, that inflation can sow the seed of its own demise. 

The idea is that the higher inflation rises, the more it squeezes living standards and lowers household spending power. By destroying demand, unemployment ticks higher and growth slows, leaving companies less able to boost prices. 

By depressing demand for other goods, the energy price spike becomes dis-inflationary. As a result, interest rates need not rise so fast or so far, assuming that consumer inflation expectations are kept in check. The inflation snake ends up eating its own tail. 

All that helps explain why the debate about whether the BOE should increase rates by half a point has melted away. Not one member of the committee vote for a super-sized rise this week, a big contrast with February when four people on the nine-member panel did. Deputy Governor Jon Cunliffe even voted to keep policy unchanged on Thursday.

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“The bank, and Mr. Cunliffe in particular, is clearly very conscious that higher current inflation is doing the heavy lifting in reining in domestic demand and thus inflationary pressures — thereby capping inflation expectations in the medium term and reducing the need for the bank to move rates in anything more than a ‘modest’ way,” Nomura’s George Buckley and Jordan Rochester wrote in a note on Thursday.

The BOE’s current path is supported by Alex Brazier, a former senior official at the central bank now serving as deputy head of the BlackRock Investment Institute. He pointed out that the rapidly worsening inflation outlook is enough to throw up questions about the recovery both for the BOE and European Central Bank.

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“Provided inflation expectations remain anchored the shock to demand brings down inflation later,” Brazier said. “The shock will have done the ECB and, to a degree the BOE’s, work for it.”

What Bloomberg Economics Says …

“The emphasis in the minutes on the real income squeeze suggests the Bank is going to let high near-term inflation do some of the heavy lifting required to cool demand. For it to work, inflation expectations will need to remain anchored – that may mean the Bank still sees a case for taking rates higher this year, but not to the levels markets expect.”

–Dan Hanson, Bloomberg Economics

The BOE made the same case in its February forecasts, which show inflation falling far below target if rates follow the market trajectory. The minutes to Thursday’s decision reinforced the point that rising prices will ultimately sap demand and bring down price gains.

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“Inflation is expected to fall back materially, as energy prices stop rising and as the squeeze on real incomes and demand puts significant downward pressure on domestically generated inflation,” the BOE said on Thursday. “The impact on real aggregate income is … consistent with a weaker outlook for growth and unemployment.”

Central to the dilemma is what Silvana Tenreyro, an external member of the monetary policy committee, has spoken of as the trade-off between inflation and growth. The worse the cost–of-living gets, the more demand is destroyed, and the worse the economic hit.

The National Institute for Economic and Social Research already expects a recession in the U.K. in the final half of this year, due to weak consumer spending. It said the hit to growth should persuade “central banks to proceed carefully, but to signal that any delays in rate hikes are merely postponements, not cancellations.”

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Similarly, Brazier says central banks still need to get rates quickly back to their “neutral level” — that is the point at which the economy is at full employment and inflation is stable. “When inflation is this high, it’s very difficult for central banks to have a policy that is stimulatory,” he said.

Neutral rates can change, however. In the euro area, the impact of the war in Ukraine is likely to push it down due to the energy price shock, Brazier said. As a result, the pressure to raise rates eases.

For the U.S. Federal Reserve and the BOE, tolerance for higher inflation does not mean they will dial back plans for higher borrowing costs. Instead, it will mean they do not need to overshoot the neutral rate to cool the economy.

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“They will normalize policy to get back to neutral, but won’t need to hit the brakes,” Brazier said. “The Fed and the BOE can raise rates fairly swiftly. But there is now less risk of them having to go beyond the neutral rate to bring down inflation.”

The U.S. is engaged in a similar debate, but Jefferies LLC economists Aneta Markowska and Thomas Simons doubt whether soaring energy prices will do much to limit inflation in America. 

“Had this shock occurred three years ago, the outcome would have almost certainly been dis-inflationary,” they wrote in a report to clients. “Today, we are leaning toward the latter scenario. Bottom line, second-order effects from higher commodity (prices) are not necessarily deflationary.”

Peter Chatwell, head of multi-asset strategy at Mizuho, is also skeptical. He thinks U.K. households will be resilient to the shock, and he fears inflation expectations could lurch out of control. 

“We think this caution will force the BOE into more aggressive tightening in May and beyond,” Chatwell said. “While we do see the consumer suffering from higher energy bills, all other dimensions — really strong job security, large accumulated savings over the pandemic, etc. — will likely lead to resilient consumption.”

©2022 Bloomberg L.P.

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A timeline of events in the bread price-fixing scandal

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Almost seven years since news broke of an alleged conspiracy to fix the price of packaged bread across Canada, the saga isn’t over: the Competition Bureau continues to investigate the companies that may have been involved, and two class-action lawsuits continue to work their way through the courts.

Here’s a timeline of key events in the bread price-fixing case.

Oct. 31, 2017: The Competition Bureau says it’s investigating allegations of bread price-fixing and that it was granted search warrants in the case. Several grocers confirm they are co-operating in the probe.

Dec. 19, 2017: Loblaw and George Weston say they participated in an “industry-wide price-fixing arrangement” to raise the price of packaged bread. The companies say they have been co-operating in the Competition Bureau’s investigation since March 2015, when they self-reported to the bureau upon discovering anti-competitive behaviour, and are receiving immunity from prosecution. They announce they are offering $25 gift cards to customers amid the ongoing investigation into alleged bread price-fixing.

Jan. 31, 2018: In court documents, the Competition Bureau says at least $1.50 was added to the price of a loaf of bread between about 2001 and 2016.

Dec. 20, 2019: A class-action lawsuit in a Quebec court against multiple grocers and food companies is certified against a number of companies allegedly involved in bread price-fixing, including Loblaw, George Weston, Metro, Sobeys, Walmart Canada, Canada Bread and Giant Tiger (which have all denied involvement, except for Loblaw and George Weston, which later settled with the plaintiffs).

Dec. 31, 2021: A class-action lawsuit in an Ontario court covering all Canadian residents except those in Quebec who bought packaged bread from a company named in the suit is certified against roughly the same group of companies.

June 21, 2023: Bakery giant Canada Bread Co. is fined $50 million after pleading guilty to four counts of price-fixing under the Competition Act as part of the Competition Bureau’s ongoing investigation.

Oct. 25 2023: Canada Bread files a statement of defence in the Ontario class action denying participating in the alleged conspiracy and saying any anti-competitive behaviour it participated in was at the direction and to the benefit of its then-majority owner Maple Leaf Foods, which is not a defendant in the case (neither is its current owner Grupo Bimbo). Maple Leaf calls Canada Bread’s accusations “baseless.”

Dec. 20, 2023: Metro files new documents in the Ontario class action accusing Loblaw and its parent company George Weston of conspiring to implicate it in the alleged scheme, denying involvement. Sobeys has made a similar claim. The two companies deny the allegations.

July 25, 2024: Loblaw and George Weston say they agreed to pay a combined $500 million to settle both the Ontario and Quebec class-action lawsuits. Loblaw’s share of the settlement includes a $96-million credit for the gift cards it gave out years earlier.

Sept. 12, 2024: Canada Bread files new documents in Ontario court as part of the class action, claiming Maple Leaf used it as a “shield” to avoid liability in the alleged scheme. Maple Leaf was a majority shareholder of Canada Bread until 2014, and the company claims it’s liable for any price-fixing activity. Maple Leaf refutes the claims.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:L, TSX:MFI, TSX:MRU, TSX:EMP.A, TSX:WN)

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 250 points, U.S. stock markets also higher

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TORONTO – Canada’s main stock index was up more than 250 points in late-morning trading, led by strength in the base metal and technology sectors, while U.S. stock markets also charged higher.

The S&P/TSX composite index was up 254.62 points at 23,847.22.

In New York, the Dow Jones industrial average was up 432.77 points at 41,935.87. The S&P 500 index was up 96.38 points at 5,714.64, while the Nasdaq composite was up 486.12 points at 18,059.42.

The Canadian dollar traded for 73.68 cents US compared with 73.58 cents US on Thursday.

The November crude oil contract was up 89 cents at US$70.77 per barrel and the October natural gas contract was down a penny at US2.27 per mmBTU.

The December gold contract was up US$9.40 at US$2,608.00 an ounce and the December copper contract was up four cents at US$4.33 a pound.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Construction wraps on indoor supervised site for people who inhale drugs in Vancouver

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VANCOUVER – Supervised injection sites are saving the lives of drug users everyday, but the same support is not being offered to people who inhale illicit drugs, the head of the BC Centre for Excellence in HIV/AIDS says.

Dr. Julio Montaner said the construction of Vancouver’s first indoor supervised site for people who inhale drugs comes as the percentage of people who die from smoking drugs continues to climb.

The location in the Downtown Eastside at the Hope to Health Research and Innovation Centre was unveiled Wednesday after construction was complete, and Montaner said people could start using the specialized rooms in a matter of weeks after final approvals from the city and federal government.

“If we don’t create mechanisms for these individuals to be able to use safely and engage with the medical system, and generate points of entry into the medical system, we will never be able to solve the problem,” he said.

“Now, I’m not here to tell you that we will fix it tomorrow, but denying it or ignoring it, or throw it under the bus, or under the carpet is no way to fix it, so we need to take proactive action.”

Nearly two-thirds of overdose deaths in British Columbia in 2023 came after smoking illicit drugs, yet only 40 per cent of supervised consumption sites in the province offer a safe place to smoke, often outdoors, in a tent.

The centre has been running a supervised injection site for years which sees more than a thousand people monthly and last month resuscitated five people who were overdosing.

The new facilities offer indoor, individual, negative-pressure rooms that allow fresh air to circulate and can clear out smoke in 30 to 60 seconds while users are monitored by trained nurses.

Advocates calling for more supervised inhalation sites have previously said the rules for setting up sites are overly complicated at a time when the province is facing an overdose crisis.

More than 15,000 people have died of overdoses since the public health emergency was declared in B.C. in April 2016.

Kate Salters, a senior researcher at the centre, said they worked with mechanical and chemical engineers to make sure the site is up to code and abidies by the highest standard of occupational health and safety.

“This is just another tool in our tool box to make sure that we’re offering life-saving services to those who are using drugs,” she said.

Montaner acknowledged the process to get the site up and running took “an inordinate amount of time,” but said the centre worked hard to follow all regulations.

“We feel that doing this right, with appropriate scientific background, in a medically supervised environment, etc, etc, allows us to derive the data that ultimately will be sufficiently convincing for not just our leaders, but also the leaders across the country and across the world, to embrace the strategies that we are trying to develop.” he said.

Montaner said building the facility was possible thanks to a single $4-million donation from a longtime supporter.

Construction finished with less than a week before the launch of the next provincial election campaign and within a year of the next federal election.

Montaner said he is concerned about “some of the things that have been said publicly by some of the political leaders in the province and in the country.”

“We want to bring awareness to the people that this is a serious undertaking. This is a very massive investment, and we need to protect it for the benefit of people who are unfortunately drug dependent.” he said.

This report by The Canadian Press was first published Sept. 18, 2024.

The Canadian Press. All rights reserved.

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