BoC's Schembri: Assessing how labour market conditions impact inflation has become more difficult

In a videocast speech to a business group cited by Reuters, Bank of Canada Governor Lawrence Schembri said on Tuesday that the relationship between labour market conditions and inflation has weakened and become more difficult to measure, thus making it harder to know when economic slack has been absorbed. 

Additional takeaways

“There is uncertainty about the level of maximum sustainable employment and the relationship between labour market conditions and inflation.”

“Understanding how high the level of employment can get without sparking inflation is crucial.”

“Evidence suggests that with firmly anchored inflation expectations, the relationship between inflation and the output gap has weakened.”

“Structural forces affecting the Canadian labour market are likely causing the level of maximum sustainable employment to change, making it harder to identify.”

“Traditional tools to measure employment aren't as useful as they once were” and the “bank is looking at new ways to measure spare capacity in the labour market.”

The “bank has developed new tools to measure impact of Covid-19 pandemic on workers and employers.”

“Despite the recent spike in inflation, medium-term inflation expectations have remained relatively well-anchored.”

“Considerable excess capacity remains in labour market” and “rates of unemployment and underemployment remain elevated.”

“We expect pandemic shock will have some scarring effects” and “could see skills of long-term unemployed workers erode and their attachment to labor market weaken.”