Canada's Misery Index On The Rise

by: Pacifica Partners

In the 1960s, an economic adviser to President Lyndon Johnson came up with the idea of an index to measure the general economic hardships felt by the masses. This index, known as the "Misery Index,” is calculated by adding the unemployment rate to the inflation rate. As inflation and unemployment eased during the 1980s, the term seemed to fade from economic discourse.

Canadian Misery Index RisingClick to enlarge

(Click here to view a larger version of this chart)

However, with rising inflationary pressures and stubbornly high unemployment levels now in both Canada and the U.S., this index may be more relevant than ever. With the 2012 presidential election around the corner, it would not be surprising to hear the term “Misery Index” dusted off for use in the political arena.

While Canada has earned accolades from politicians and individuals for its fiscal prudence and strong banking system, many Canadians are not receiving the benefits of the gleeful conditions that they are being told they are experiencing. One example of this discontent is the “Occupy” movement that started in Wall Street and made its way to Canada and elsewhere. Looking at the news headlines, it seems Canadians are none too happy with corporations and the lack of economic progress on Main Street. As the chart shows, the Canadian misery index has stealthily marched higher after hitting a low in the first quarter of 2008. The data indicate that the cost of living in Canadian cities is rising, and high unemployment is mounting.

What is also apparent is that Toronto’s misery is at 16-year highs, while Vancouver’s and Montreal’s misery has also climbed sharply higher, and is now above the psychological threshold of 10%. Many might find this surprising, since this is counterintuitive to the broadly bullish opinions that have become the consensus. This finding is particularly noteworthy because the Organisation for Economic Co-operation and Development has singled out Canada as a country facing significant challenges from a steady climb in consumer debt.

Looking at the data in the chart above, Canadians may wish to consider the underlying trends in inflation and unemployment before making major financial decisions. Recent unemployment data in Canada shows unemployment at 7.3% and inflation rising to an uncomfortable 3.2%.

Critics will note that by excluding volatile items such as food and energy, inflation is up 1.9%, and that the misery index has traditionally used total, or “headline," inflation. At the same time, many investors and non-investors alike are particularly irked by the “excluding food and energy” part of inflation data. With a hint of sarcasm, they will say, “Sure, inflation is no problem – if you do not have to drive or eat.” It is true that globally, much of the increase in headline inflation has been driven by food and energy prices due to weather and the effects of easy monetary policy in the US. Should headline inflation persist through high energy and food prices, it could trickle down into the core-inflation numbers.

With the Canadian and U.S. economies so closely linked to one another, what happens in the States impacts Canada. Much of what happens to Canada’s economy depends on the policy path of the Federal Reserve. Simply put, Fed policies impact the global economy. Yet, it is often forgotten that the Federal Reserve has a dual mandate. Apart from keeping prices (inflation) under control, the Fed is supposed to be mindful of the U.S. unemployment rate. To that end, with 14 million Americans out of work, the Fed sees unemployment as the bigger issue.

The danger of the Fed’s focus on lowering unemployment is that it could inadvertently stoke inflation. As Central Bankers have learned from past experience, once the inflation genie is let out, it is difficult to rein it in. Time will tell if this will be the case, but if inflation becomes persistent, then the misery index will become a much more popular economic data point than it has been in a very long time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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