Inflation Falls in Canada, but Employment Drops as Well

GERMANY'S Bundesbank may be pushing up interest rates, but in Canada rates are still falling.

The inflation rate in Canada is at the lowest it has been in 30 years, dropping to 1.1 percent in June. Not since May of 1962, when John Diefenbaker was prime minister, have prices increased so slowly.

But what is being hailed as a triumph by the federal government and the Bank of Canada - the equivalent of the United States Federal Reserve Board - is being called a failure by economists, even some in the business community.

"We have one of the highest unemployment rates in 30 years too," says Douglas Peters, who was until two weeks ago chief economist at the Toronto Dominion Bank. "The Bank's inflation policy has been a success but they've done it putting 1.6 million people out of work and putting the economy into a recession for the past two-and-a-half years," he says.

Canada's unemployment rate is at 11.6 percent, an 8-year high. The government now faces the political reality of getting the unemployment number down and its 22-percent popularity rating up.

"The big concern now is that the recovery won't generate the kind of job creation necessary to bring the unemployment rate down," says Donald Mazankowski, the finance minister. But Canadians have had some good economic news:

* There has been a sharp decrease in imports combined with a modest rise in exports, especially to the US. Statistics Canada, a government agency, reported the country had a merchandise trade surplus of $1.2 billion (Canadian; US $1 billion) in May, up from $646 million in April.

* Sales of existing houses were up 5.6 percent in June, though prices are still falling, down 1.8 percent to a national average of $160,611.

* Fewer shoppers are traveling to the US looking for bargains and cheap gasoline. Same-day automobile trips to the US - 5.1 million - were down about 3 percent from May of last year.

* Interest rates are down. The prime rate - charged to best customers - is at 7 percent, down from 9.75 percent a year ago. But low inflation and cheap loans have not revived Canada's sluggish economy.

"We still have interest rates that are 2 percent higher than US interest rates," Mr. Peters says. "Real interest rates - inflation adjusted - are almost as high as they were in the recession of 1981-82."

Economists - along with the government and the Bank of Canada - point out the benefits of low inflation: It protects people on fixed incomes, especially pensioners. It makes the country more competitive.

But there are disadvantages. Expectations of everyone from the average homeowner to the average car worker may have to be lowered as guaranteed price rises become a thing of the past. "This has profound implications," says Lloyd Atkinson, chief economist at the Bank of Montreal. "A lot of people make decisions expecting that they're going to be bailed out through higher inflation. [But] the rules have changed."