Canadian interest rates must be just right for a Goldilocks economy: Don Pittis

Canadians burdened by large mortgages and record consumer debt-to-income ratioscan likely breathe a sighof relief this week as they wait to see whether the Bank of Canada raises rates again.

Of course, following the last rate hike that came as a bolt from the blue, onecan never be sure.

And while most of the recent data tells us the Canadian economy has gone off the kind of boil that would makerate hikes mandatory, there is at least one statistic that indicates the central bank's long-term prediction of higher inflation is still on track.

"Inflation models for sure are not broken," Bank of Canada governor Stephen Polozsaidin Washington last weekend.

So far the bank's data showsthe economy still has room to grow without bidding up the available supply of labour and capital. That difference between current growth and the economy's capacityis called the output gap.

In fact, Poloz said, rather than closing that gap, the Canadian economy seems to be expanding its capacity by doing things like educating more young people andimproving public and private infrastructure.

"It's good because it's the sweet part of the cycle," the governor said. "It's where you're actually creating new capacity, which is permanent, so it's a very positive thing."

According to the Bank of Canada's survey of business sentiment released last week, the Canadian economy is not too hot and not too cold. That's sometimes referred to as a Goldilocks economy, taking its name from the children's story where a little girltastes all the bowls of porridge until she finds the one that's just right.

No longersmoking hot

Without reading too deeply into values that allow a self-entitled blond-haired child to break into therural home of a family of trusting bearswhile they are out for a short walk, a Goldilocks economy is seen as a good thing.

The survey of business leaders showed the economy was no longer smoking hot. Nonetheless, they remained optimistic as overseas orders were strong and sales were growing. Businesses were still planning more spending on expansion and were not overly worried about the impact of a trade dispute with the U.S.

Businesses report it's difficult to find workers, and with last week's announcement of new jobs from online retailer Shopifyand Google parent Alphabet's new project on the Toronto waterfront, that'slikely to continue.

• Sentiment still positive but less thanin the summer says Bank of Canada survey

Last week's manufacturing data was strong based on vehicle parts and higher fossil fuel prices, but other stats showed a moderate or cooling economy. Retail sales weakened.

It's just gas

Friday's inflation figures showed prices were rising faster, up to 1.6 per cent in September compared to1.4 per centthe previous month.

That's getting closer to the Bank of Canada's twoper cent annual inflation target, but as Statistics Canada said in the second line of its release, the increase was almost entirely due to the price of gasoline driven higher by the hurricanes that hit the southern U.S. in late August and September.

The rise masked plunging costs for clothing, shoes and furniture as the loonie took flight.

"The all-items CPI excluding gasoline" rose 1.1 per centyear over year in September, the report says.

But that relatively low inflation figure, obtained by leaving out gasoline, harks back to an outmoded measure of underlying inflation, the so-called core.

As explained in a column earlier this year, three fancy new core measures are supposed to give a far more accurate reading, and a look atthat section of the report is less reassuring that interest rates will stay low.

Inflation rising

Over the past four months, all three of those core measures have been quite consistently creeping up, with "CPI-median," the measure that samples prices of the least volatile goods and services, showing a steady rise from 1.5 to 1.8 per cent.

Tomorrow, the embattled federal finance minister, Bill Morneau, is expected to release his fall economic statement, sometimes called the autumn mini-budget, and the CBC political bureau reportsthe news is expected to be optimistic.

• Business sentiment still positive, but less than it was in the summer

With fences to mend, andwith revenue up andthe deficit down,Morneaumay be tempted into more spending promises that would put upward pressure on future inflation that Polozwill eventually have to quell with higher rates.

But for now, it's time to eat up your porridge and enjoy the Goldilockseconomy. And maybe even have a little nap before the bears come back.

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