Varcoe: Alberta locks in affordability measures as interest rates grow

Higher bills, falling consumer demand, escalating interest rates — it’s a trifecta of trouble to wind up a tumultuous 2022

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Shortly before the UCP government introduced legislation to activate a $2.8-billion relief package for Alberta businesses and consumers stung by surging inflation, the Bank of Canada ratcheted up its key interest rate.

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Again.

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It’s the seventh such increase since March.

Higher bills, falling consumer demand, escalating interest rates — it’s a trifecta of trouble to wind up a tumultuous 2022.

Can the provincial government significantly shield Albertans from the deluge caused by surging shelter, food and energy bills? Or, like King Canute, is the tide simply too powerful to hold back?

“I don’t think that (rate hike) in any way diminishes the significant inflation relief that is contained in this comprehensive package,” Matt Jones, Alberta’s affordability and utilities minister, said Wednesday.

The assistance plan, first revealed by Premier Danielle Smith last month, comes with a $2.8-billion price tag over three years.

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Some measures are targeted; others are more broadly based.

There will be $100 payments made to eligible seniors or families (for each dependent child) that have annual household incomes under $180,000, for six months starting in January.

The government is reindexing AISH, Income Supports and the Alberta Seniors Benefit — they will go up by six per cent on New Year’s Day — and it’s indexing personal income taxes to inflation, retroactive to the start of this year.

The province will continue suspending its excise tax on gasoline and diesel until June, and extend the relief at the pumps after that period, based on benchmark US oil prices.

It will temporarily cap electricity prices for consumers on the regulated rate option, at 13.5 cents per kilowatt-hour, for the first three months of next year, although prices above that mark will be deferred and recovered during lower-priced months.

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Another $200 in power rebates will be provided on bills from January until April, in addition to rebates that began this summer.

It’s a big bite at $2.8 billion—and it needs to be, given the broad economic forces at play.

“It’s a marginal relief,” said Alberta Central chief economist Charles St-Arnaud.

“Every little bit helps.”

The inflation rate in Alberta increased to 6.8 per cent in October. Food costs were up 10 per cent from a year earlier.

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Shelter expenses climbed nearly seven per cent.

People are hurting. And interest rates continue to march higher.

The Bank of Canada hiked its key interest rate on Wednesday by half-a-percentage point to 4.25 per cent.

Bear in mind, it sat at just 0.25 per cent at the start of this year.

Bruce Galts, who owns Galko Homes and Paul Davis Restoration of Lethbridge, said inflation continues to push up prices in his businesses for key items such as windows, flooring, lumber and labour, as well as boost the monthly utility bills.

Higher interest rates are now undercutting consumer demand for housing.

“I don’t like seeing interest rates go up, but we’re in this quantitative with inflation and we need to get that under control, too,” said Galts, who is also the chair of the Alberta Chambers of Commerce.

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“Frankly, both rising interest rates and having (high) inflation hurt us badly.”

In a news release, the Bank of Canada noted the labor market remains tight and there’s excess demand in the economy, although there is evidence recent rate hikes are restraining consumption and the housing market continues to drop.

“Inflation is still too high and short-term inflation expectations remain elevated,” the bank stated.

St-Arnaud believes inflation likely peaked in the summer, but noted it takes up to 18 months for interest rates to fully slow down demand.

He expects the Canadian economy will grow by 0.5 per cent next year — likely to shrink during the first half of 2023 — while the Bank of Canada tries to cool things down without plunging the country into a deeper recession.

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St-Arnaud believes the latest increase should be enough tough medicine to cure soaring inflation.

“My feeling is we’re probably done,” he added.

“We have record levels of household debt, businesses also very much indebted. . . so it’s a vulnerability to the economy that could quickly snowball into a bigger recession if we start to see big job losses.”

The Bank of Canada building in Ottawa.
The Bank of Canada building in Ottawa. Photo by Justin Tang/Bloomberg

All of this makes for a tenuous situation as inflation is well above the bank’s target level — and consumers are feeling the pain of high prices.

It might be easy to discount the effect of some of the provincial measures, but as a new report from the University of Calgary’s School of Public Policy illustrates, Albertans on social income supports have fallen behind as rising housing and food costs gobble up a bigger portion of their monthly budgets.

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Alberta’s reindexing of income supports by six per cent to make up for the effect of inflation is good public policy, although it’s “not sufficient to recover the purchasing power lost during the past nearly three years when inflation was high and social assistance was not indexed, it states.

Kudos to them for doing it. I just don’t know where they got six per cent — it’s nowhere close to what it should be,” said report co-author Ron Kneebone, a U of C economist.

As for the broader relief package, Kneebone believes the affordability measures will help, although the reality is provinces are limited in their ability to offset such economic forces.

“There just aren’t many things that a provincial government can do to deal with the rising cost of living,” he added.

“But they can look after the most vulnerable.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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