Pressure on the Bank of Canada -- and the Fed

If the Bank of Canada's interest rate decisions are data dependent, as Governor Stephen Poloz never tires of reminding us, then the data are already starting to build the case for the next rate hike.  Today StatsCan reported a sharp rise in retail sales for May (up 2.0 percent in both current and constant dollar terms in the month) and, more importantly, a further rise in inflation for June. The year-on-year increase in headline CPI reached 2.5 percent in the month, the fastest increase since February 2012.

Much of the blame for the continuing rise in headline CPI lies with gasoline prices, now an eye-watering 25 percent higher than a year ago (tell me about it!)  But in truth, inflation pressures seem to be becoming more broadly entrenched, with seven of the eight major components of the index moving higher in the month.  With recent labour force data showing the economy nearing full employment and wage pressures increasing, there is little reason to expect that CPI will soon start to move back below the Bank's 2 percent target.

Two of the Bank's three favoured core measures of inflation edged up to 2.0 percent in the month, with the third holding at 1.9 percent. This offers some slight relief to the Bank, and probably means that there will be no rate increase at the next Governing Council meeting, set for September 5.  However, a further 25 basis point rate hike by year end looks more likely than not.

Meantime, pressure is also building on the US Federal Reserve, but not from the economic data.  President Trump has started to criticize the Fed's policy tightening   This morning's customary Twitter rant saw Trump arguing that Fed rate hikes, coupled with currency manipulation by the ECB and the Bank of China, are pushing the US dollar higher and thus taking away the US's "big competitive edge", whatever that is.

The weakest student in the weakest economics program in the country would have no trouble figuring out that the major elements of Trump's economic "policies" -- higher tariffs on imports, and a wildly stimulative fiscal policy at a time when the economy is already at full employment -- are a recipe for higher inflation, which is the Fed's major concern.  Good luck explaining that to the very stable genius in the Oval Office.  And don't expect much help from Trump's chief economic advisor, Peter Navarro, who seems to be as clueless as his boss despite holding a PhD from Harvard.

Maybe Trump is simply lining up the Fed to be the fall guy in case the rest of his policies start to go off the rails.  That's bad enough, but consider: Trump is already laying waste to the world trading system, including NAFTA and the WTO.  If he is now starting to take aim at the independence of the Fed, the potential damage to the global economy could be very severe.