Inflation and Wal-Mart.

With the recent increase in the Bank rate to counter smoldering inflation, it pays to remember that since the 1990s, Canada has enjoyed low inflation rates under the leadership of the Bank of Canada. The Bank of Canada has focused its efforts on inflation-control targeting. In 1991, inflation as measured by the Consumer Price Index (CPI) was 5.9 percent and by the end of 1993 had been reduced to 2 percent. It has since remained in a target range of between 1 and 3 percent. This inflation performance has been largely replicated in Northern Ontario also. What is remarkable about this accomplishment is that we have now enjoyed more than a decade of low, stable inflation as well as low interest rates, combined with rising employment and per capita output throughout much of Canada.

When an economy is at its long-term potential output level, it is the growth rate of money supply that determines the inflation rate--a simple dictum that inflation is ultimately a monetary phenomenon. The growth rate of money supply moved with inflation measures in a downward trend from 1991 to approximately 1997. Since 1998, however, the growth rate of money supply has surged substantially upwards while the inflation rate has remained stable. From 1991 to 1997, average monthly inflation was 2.1 percent while the monthly growth rate of money averaged 3.3. From 1998 to 2006, inflation averaged again at about 2.1 percent but the money supply had an average monthly growth rate of approximately 5 percent.

The crucial question is how the Bank of Canada to maintained low interest rates, expanded money supply at a healthy clip, and kept inflation low for all these years? In his 2006 book titled "The Wal-Mart Effect", Charles Fishman chronicles the impact of Wal-Mart on retail markets in the United States and the effect on consumer prices through its aggressive price and cost cutting strategies. In part, Fishman argues that Wal-Mart's effect in the United States has been so pervasive that it has actually helped keep the U.S. inflation rate down. Not only is there the direct effect of Wal-Mart's cost cutting but the indirect effect on all its competitors who must match its efforts in order to compete.

Wal-Mart came to Canada in 1994, at about the time our rate of inflation had been wrestled down to about 2 percent--where it has since remained. Wal-Mart arrived in Canada with its purchase of 120 Woolco stores and has since grown to over 280 stores as well as 7 Supercentres--its next phase as it enters the grocery market. Wal-Mart is now the largest retail company in the world and has estimated retail sales in the United States of over 300 billion dollars with Canadian sales estimated at about 14 billion dollars. Its incredible buying power and the use of a multitude of low cost suppliers has led to a structural shift in retail that has lowered costs that spilled over onto the rest of the economy. The added impact of the spread of big-box retail throughout Canada has probably amplified this effect. In Northern Ontario, Wal-Mart is a presence not only in the larger cities such as Thunder Bay and Sudbury, but also smaller communities such as Dryden and New Liskeard.

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As incredible as it may seem, Wal-Mart's arrival in Canada in the early 1990s probably contributed to creating downward cost-side pressures that have helped keep inflation low. This has allowed the Bank of Canada to simultaneously boost money supply and keep interest rates low, thereby fueling our ongoing economic boom.

It seems that in Canada, inflation fighting has been accompanied by a Wal-Mart price rollback smiley face. However, given the recent resurgence in inflation, it may be that we have reached a limit on cost-reductions that can be wrung out of the economy via the structural shift in retailing, especially in the wake of rising resource prices. Fortunately, the rising dollar may also be helping to moderate some price increases given our tendency to import many goods. However, interest rates are likely to continue to rise slightly as the Bank of Canada reigns in any potential inflationary pressures.

Livio Di Matteo is Professor of Economics at Lakehead University.

www.economics.lakeheadu.ca