 Welcome to Mind Your Business ! Consider this your weekly guide to understanding what’s happening in the worlds of economics, business and finance. By Peter Armstrong | | |  | What should policy makers really do about inflation? (Hyejin Kang/Shutterstock) | | | I've had a question rattling around my head for a while now. I've kept pushing it to the back of my mind, I think in part because I don't think I'll like any of the answers.
The question is: what if all these interest rate hikes don't work?
Since January of last year, the Bank of Canada has raised rates by 450 basis points (or 4.5 percentage points).
GDP came down from the highs we saw in early 2022. But it has been been stubbornly strong ever since. The jobs market has shrugged off any notion that it should slow. There are 900,000 more people working today than there were before the pandemic. (Though Friday's jobs report showed signs that the heat in the job market may finally be coming out.)
Inflation has decelerated from 8.1 per cent at the peak all the way down to 4.4 per cent in April.
Last week, the Bank of Canada abandoned its pause of rate hikes and raised borrowing costs by another 25 basis points.
“We've had an accumulation of evidence on many fronts, over time and across a whole set, that tells us now that inflation seems to be more sticky, and it's going to be harder to get it down to that two per cent [target]," said deputy governor Paul Beaudry.
Look at the economic indicators. They are slowing, sure, but have they slowed enough? You can see why the central bank is worried. | | |  | | | The question is, what will another 0.25 per cent rate hike really do?
I'll be particularly interested to see how the U.S. central bank, the Federal Reserve, frames these issues this week.
The Fed has the added benefit of fresh inflation data that will be released on Tuesday.
Inflation numbers are spliced and sliced seven ways from Sunday. There's "median" and "trim" and "core" and "core ex services" and, and, and.
But the wonderful economist Trevor Tombe pointed out something this week that I will be watching for.
In its decision to hike rates last week, the Bank of Canada specifically cited "three-month measures of core inflation running in the 3½-4% range for several months" as a key reason for the need to raise borrowing costs.
And that's true. When you look at a three-month period, core inflation does seem stubbornly high.
But one small issue.
"The problem I have with quoting this statistic is that it includes mortgage interest rates," tweeted Tombe. "This is not about supply/demand, but about a policy choice raising measured inflation." | | |  | | | Armine Yalnizyan, the Atkinson Fellow on the Future of Workers, seized on this same issue, pointing out that mortgage interest costs were the biggest driver of inflation in April.
My colleague Aarti Pole spoke with Yalnizyan right after the bank released its decision, and asked whether rate hikes are working — and if not, what that tells us.
"You have touched on an existential debate about the credibility of central banks, and the medicine that is required to tame this particular bout of inflation," said Yalnizyan.
She says this run of inflation is unlike anything we have seen in a generation, with a war in Europe, a global pandemic and broken supply chains.
"Raising rates isn't necessarily the right medicine. However, it's the only medicine we have relied on since the 1980s. So dammit, we're gonna keep doing it," Yalnizyan told Pole.
I raise all this in part because I'll be fascinated to see how many of these same quirks and concerns are embedded in the U.S. data we will be looking at this week.
As always, send me a note here: peterarmstrong@cbc.ca
Or continue the conversation on Twitter here.
If you like this newsletter, spread the word. I'm trying to grow our community and would love your help. Just click on the share buttons below. | | |  | | The latest national housing numbers will be released this week. The Canadian Real Estate Association will release its sales data for May on Wednesday. | | | | | | The U.S. Federal Reserve will release its latest interest rate policy on Wednesday. The Fed is expected to leave rates unchanged at 5.25 per cent. | | | | | | American inflation numbers will be released on Tuesday. The year-over-year rate looks to have cooled slightly to 5.4 per cent. | | | | | Three things to read, watch and listen to this week | | |  | A handout image taken from a video released by Prigozhin Press Service shows the head of the Wagner Group, Yevgeny Prigozhin. (Prigozhin Press Service via AP) | | | 1. Putin's propaganda war | | | By now, just about everyone has heard of the notorious Wagner Group, the mercenaries helping fight Russia's war in Ukraine.
What I didn't know is that the Wagner Group and its head, Yevgeny Prigozhin, are also part of a huge and expensive propaganda machine in Russia.
Consider the Russian film The Best in Hell. It's a feature film that chronicles the brutal battle for control of an unnamed European city.
Many believe the film is a thinly veiled recreation of a key 2022 battle in the Donetsk region in which thousands of Ukrainian civilians died.
The film was co-written by a guy named Aleksey Nagin. An amazing piece in the Hollywood Reporter says Nagin is a former Russian soldier turned professional mercenary for the Wagner Group.
"In 2019, Prigozhin began producing blockbuster war movies. The heroes of many of his feature films are based on the mercenaries he controls, with Putin’s support, in Russian-sponsored military activities across the globe," wrote Scott Johnson in The Hollywood Reporter.
"Prigozhin’s films are a slicker, higher-octane version of the so-called boeviki movies of the late 1990s, cheap, Rambo-style action flicks that, all available evidence to the contrary, somehow managed to spin the Soviet Union’s inglorious defeat in Afghanistan in 1989 as a triumph," wrote Johnson.
The whole piece is a fascinating glimpse into how Russian President Vladimir Putin is trying to win over Russians at home and abroad. And how important a role Prigozhin has played in those efforts.
Check out the Hollywood Reporter piece here | | | 2. Peak China? | | | I've read (and written) a bunch of pieces over the years that have predicted China's decline as an economic powerhouse.
The conversation seems to come and go, blowing in the various trade winds and global views of what's about to happen.
The short version of the debate is that China has two key problems. The first is a demographic shift that would see more old people retiring in the country than young people working.
The second is a general decline in globalization. There has been a growing push against global trade deals for years, accelerated first by U.S. president Donald Trump, then by the shipping/supply chain chaos that ensued when COVID-19 crashed into the economy.
I've been reading Ian Bremmer's newsletter recently. He's the president and founder of Eurasia Group, a consultancy group that focuses on geopolitical risk.
The newsletter is a short, pithy blast of his insight into some of the biggest issues around the world.
In this recent edition, Bremmer points out that China's economic slowdown is structural. The country is much wealthier now than it was. But the downside is that labour is now much more expensive than it was, which eats into the country's role as the factory of the world.
GDP growth fell all the way down to six per cent before 2019. This despite vast swaths of government stimulus masking even weaker underlying growth.
"Not only has growth slowed every year for a decade, but most importantly, the quality of China’s growth has deteriorated. Infrastructure has been overbuilt to juice up growth, with dozens of 'ghost cities' outfitted with new apartment buildings, roads and bridges … and no people — the definition of growth without productivity. All this stimulus has been financed by an explosive debt bubble that Beijing has shown little willingness or ability to deflate," wrote Bremmer.
But! While all that may be true, Bremmer says it doesn't necessarily mean the decline of China is finally upon us.
Its growth is still better than what most countries could even dream of. That demographic issue is real and it will come home to roost. But it's not (yet) a problem.
So, Bremmer's take?
"This is a dramatically more challenging domestic and global environment than China has experienced in decades … and it’s only going to get worse. But while China faces 'stormy seas,' I think on balance it still has substantial upside," he wrote.
This China edition of the newsletter is a typically smart, well-informed take on the kinds of stuff we talk about here all the time. So do yourself a favour and give it a read.
Check out Ian Bremmer's newsletter here. | | | 3. Messi economics | | | In a single move, Lionel Messi changed the face of North American soccer.
The Argentinian giant announced last week that he's joining the team Inter Miami. Messi reportedly turned down a $400 million US offer from the Saudi football league.
The economics of this deal are staggering.
Miami's team is set to sell a mind-boggling amount of merchandise. Last year, Messi's club Paris Saint-Germain sold $130 million worth of Messi jerseys.
To put that in context, the total revenue for the highest-earning soccer team in the United States is $116 million.
This Yahoo News item claims Inter Miami already has more Instagram followers than any other sports team in America.
A piece in a Spanish daily sports publication says PSG made a staggering $767 million as a result of Messi's arrival in 2021. New sponsors lined up to sign on and existing sponsors paid higher fees.
And why is Messi doing all this now?
Well, The Athletic says Messi has negotiated a cut of the revenue from new subscribers to Apple’s MLS Season Pass streaming plan. A profit-sharing agreement between him and Adidas is also in the works. And he has an option to buy a stake in an MLS team when he's done playing.
Check out The Athletic's piece here.
Read the Yahoo News item on the deal here. | | | How the economy looks beyond Bay Street | | | Don't rush to make assumptions | | | I'm still digesting last week's Canadian jobs numbers.
In a lot of ways, the Labour Force Survey for May just kind of feels like the data catching up to the forecasts. For months now, we assumed the economy would slow.
The Bank of Canada raised interest rates by 425 basis points in eight straight hikes. All that was supposed to slow consumers down.
If we bought less stuff, price growth would moderate (at least in theory). If that happened, one clear side effect would be seen in a sharp slowing of the labour market.
Employers don't usually hire new workers when they aren't selling anything.
And yet the jobs market continued chugging along.
Until last week, when Statistics Canada reported that Canada had actually lost 17,300 jobs in May. Youth employment led the decline (just as summer hiring should be ramping up). Check out colleague Aloysius Wong's excellent piece breaking down the numbers here.
What should we make of it?
Well, Brendon Bernard, the chief economist at the job search site Indeed, has this always timely advice: don't jump to conclusions. | | |  | Maybe this is the long-awaited slowdown we've been expecting. Maybe it's just a statistical blip that doesn't really mean anything.
We can easily get caught up in the immediate data and leap to conclusions and assumptions that may not be backed by the facts.
It's a weird time in the economy and we are cobbling together shards of data that look back at what happened last week, last month and last quarter, trying to use those to build a model for what may happen next week, month or quarter.
I'm as guilty of it as anyone, and every now and then it's good to remind myself to hold off and wait. Next week's data will come and give us all new pieces of information.
I'd love to hear from you. Drop me a line at peterarmstrong@cbc.ca. | | | Share this newsletter | | or subscribe if this was
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