(Bloomberg) -- Prime Minister Justin Trudeau's government is at risk of adding to Canada's inflation problem if it unveils more big-ticket spending measures this fall, a Bank of Nova Scotia economist said in a note to clients.
Finance Minister Chrystia Freeland is expected to give the government's first major statement on taxes and spending since Trudeau's Liberal Party won re-election on Sept. 20, including tens of billions in new spending. She should refrain from adding that stimulus to an already hot inflationary environment, Scotiabank's Rebekah Young said Monday.
“Even since the elections, we've seen vulnerabilities in the recovery in terms of higher inflation and severe labor shortages -- so different economic issues are emerging and appearing bigger than during election time,” Young said by phone.
Canada has reported inflation of higher than 3% -- the upper end of the Bank of Canada's control range -- for six straight months. That streak is almost certain to reach seven months when October's inflation numbers come out on Wednesday: Economists are expecting a 4.7% price rise.
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In response, the central bank has ended its bond-buying program and accelerated its timeline for rate increases. “Our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer,” Governor Tiff Macklem wrote in the Financial Times on Monday.
The government shouldn't complicate Macklem's task, Young said.
New spending “could potentially exacerbate the pressures we are seeing right now on the inflation side,” she said. “So they could make the job more difficult for the Bank of Canada if they go out with a whole lot more.”
Trudeau's Liberals promised C$78 billion ($62.3 billion) over five years in new spending measures during the election campaign. That's on top of C$140 billion in spending earmarked over five years from Freeland's 2021 spring budget.
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