Today's not just the start of a new month but also Canada Day. While our North American neighbors proudly fly the maple leaf flag, Enda Curran uses the national holiday as an opportunity to look at the Bank of Canada's decision to cut rates and how that may affect the US. Plus: Online shopping warehouses help Shippensburg, Pennsylvania, fulfill its destiny, and fast-food restaurants still hope you want a fried chicken sandwich for lunch. If this email was forwarded to you, click here to sign up. On this Canada Day, we ask, are there lessons from the north for the US economy? Last month, the Bank of Canada in Ottawa turned heads when it cut borrowing costs to reduce its key policy rate from 5% to 4.75%, becoming the first Group of Seven central bank to do so and putting it way ahead of the Federal Reserve. At the time, Governor Tiff Macklem said the Bank of Canada didn't need to move in lockstep with its southern neighbor—which held rates steady in June at 5.5%—even though the cut would potentially mean a weaker Canadian dollar. Macklem at an event in Washington in April. Photographer: Samuel Corum/Bloomberg A slowing economy prompted the Bank of Canada to make the cut, offering welcome relief to households and businesses. That willingness to move contrasts with the Fed's decision to hold rates at multidecade highs until it sees the white of inflation's eyes. There may be good reason for the US central bank's caution. No sooner had Canada cut than May's inflation data arrived with a surprise—the consumer price index rose 2.9% from a year earlier, up from 2.7% in April. More worrying, the Bank of Canada's two core inflation measures also accelerated, averaging a 2.85% yearly pace, faster than economists had expected. That combination of data brought an end to a four-month string of easing price pressures and raises obvious questions about whether the central bank can bring rates down again any time soon. Shelter costs remain the biggest inflation offender—Bloomberg Economics cautions that Canadian home prices could rise as rates fall—but food prices are also tracking higher. All of which does offer some lessons for the Fed. Doves say the US central bank needs to cut rates now as consumer confidence weakens (it fell last month amid worries about business conditions, the job market and incomes) and as consumer spending is reined in. Unemployment has nudged higher to 4%. Data released on Friday showed the Fed's preferred measure of underlying inflation decelerated in May. Although inflation is headed in the right direction, Fed officials have been at pains to say they need to see months of more progress before they cut. That's in part because the labor market remains strong. No central banker wants to be guilty of policy error by cutting rates only to see inflation accelerate. It's the cardinal sin of central banking. Which is why, by the time Canada Day rolls around again next year, either the Fed will look smart for staying its course or Canada will hold the honors for moving before it was too late. |
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