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Economic Viewpoint

Will the Drop in the Unemployment Rate Drive Inflation Up in Canada?

April 17, 2018
François Dupuis, Vice-President and Chief Economist • Benoit P. Durocher, Senior Economist

Canada’s unemployment rate has dropped sharply in recent months which, according to economic theory, could trigger faster inflation due to more sustained wage growth, among other things. The historical relationship between the unemployment rate and price fluctuations, however, shows that inflation does not react as sharply to changes in the labour market as we might believe. Moreover, some factors are currently curbing wage growth, while underlying global trends are still moderating the rise by prices. Nonetheless, we can expect price growth to accelerate in Canada, which argues for a gradual rise by key interest rates.