Labour shortages could push up wages, 'reignite inflation' in long run, report warns

Inflation to 'reignite'?

A new report says a protracted labour shortage in Canada could fuel more rapid wage growth and inflation over time, potentially prompting the need for higher interest rates long-term.

The RBC Economics report says wages are growing quickly in Canada, but so far not fast enough to match inflation.

In November, for example, the report says average hourly earnings were up about 10 per cent compared to pre-pandemic levels for the fastest pace of growth since the 1990s, but that's still still below the roughly 12 per cent inflation over the same period.

RBC says wage increases this year will likely be soaked up by higher prices and debt costs, lowering disposable incomes.

But the report says long-run structural labour shortages could push wages higher, reigniting spending and inflation — forcing central banks to keep interest rates elevated.

Yet RBC says the worker shortage could be offset by capital spending on productivity-enhancing investments like automation.

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