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The misery index, that unhappy sum of inflation and unemployment rates, has surged to heights last seen three decades ago.

Sharply higher inflation is driving that rise, for now. But the misery index – which aims to distill down to a single number the economic pain caused by rising prices and job losses – is likely to go higher still in the coming months, as the Bank of Canada’s aggressive interest-rate hikes start to weigh down the economy and push unemployment up from its historic low. Inflation, however, is likely to decline only gradually, with the central bank forecasting an average of 7.2 per cent this year.

With the exception of the whirlwind month of May, 2020, it’s been almost 30 years since the misery index has been this high, as the chart below shows. In late 1993, the index stood at 13.1, just ahead of the 13 recorded for June of this year and in May, 2020.

But there are some significant differences between the index of 1993 and today’s version. For one, there is the composition. In 1993, virtually all of the misery in the misery index was coming from job losses: The unemployment rate was 11.4 per cent, while inflation clocked in at just 1.7 per cent.

Today, that situation is reversed. June’s unemployment rate was 4.9 per cent, the lowest on record. Inflation, however, jumped to 8.1 per cent.

More worrying, however, is where the misery index is headed. In 1993, the Bank of Canada was nearing the end of its campaign to break the back of inflation, which had crested at 6.9 per cent in January, 1991.

By 1994, inflation was in full retreat, with the Consumer Price Index edging up just 0.2 per cent that year. The unemployment rate, driven higher by the bank’s sharp increases in its benchmark interest rate, declined much more slowly. But, by the end of 1994, the job market was rebounding, with the unemployment rate dropping almost two percentage points.

That sent the misery index on a sharp downward path and set the stage for a quarter-century of quiescent inflation and gradually declining unemployment rates.

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Today, however, the index is likely to continue to rise. There are early signs that inflation may have hit a peak, but it will decline only slowly; the Bank of Canada says it takes several quarters for the full impact of interest-rate hikes to make its way through the economy.

Conversely, June’s record-low unemployment levels will certainly increase if economic history is any guide, says University of Waterloo economics professor Mikal Skuterud.

On top of that, the decline in the unemployment rate in June hinted at trouble to come. The Canadian economy actually lost 40,000 jobs last month, the first such loss during the pandemic that was not tied to public-health measures. The unemployment rate only declined because of a sharp contraction in the ranks of those looking for work – hardly a positive sign for the economy.

Prof. Skuterud says it is hard to predict which sector of the economy will bear the brunt of job losses. Typically, it’s capital-intensive, debt-laden manufacturers that shed workers during an economic downturn. But many retailers and others in the service sector are carrying heavy debt loads incurred as they strived to make it through more than two years of public-health restrictions. They, too, will be exposed to the pain of higher borrowing costs.

“We’re in a really strange cycle here,” he said.

Even a relatively modest uptick in unemployment, such as the rise of almost three percentage points during the 2008-09 financial crisis, would push the misery index toward the level it reached in the depths of the sharp recession of the early 1990s.

If anything, that understates the economic pain represented by today’s misery index, said Jason Clemens, executive vice-president of the Fraser Institute. Canada has not seen inflation at current levels since the 1980s, he said. Current low unemployment rates have more to do with long-term trends reducing the expansion of the labour force, he noted.

Jeremy Kronick, associate director of research at the C.D. Howe Institute, said June’s joblessness rate is close to what economists would call the natural rate of unemployment, increasing the likelihood that it will rise as interest rates head higher.

Inherent in the idea of the misery index is the assumption that the same-sized change in inflation or unemployment inflicts equal pain. But that’s not necessarily the case for the economy, and certainly not for individuals.

Most workers are spared the direct pain of job loss, even during severe recessions. But for those who are thrown out of work, the financial damage can be severe.

Conversely, higher prices hit all households, just not equally.

Mr. Kronick said inflation could be the more vexing issue for governments. Rising unemployment can be curbed through aggressive fiscal policy. But there’s little a government can do in the short term to reduce inflation, beyond not adding to the problem with an expansionary fiscal policy. (Currently, Ottawa is not heeding that maxim, as it continues to run a deficit.)

And then there is the matter of who suffers when the misery index starts to rise. Prof. Skuterud said low-income households would ostensibly feel the most pain, because higher inflation squeezes their smaller budgets harder. But he added it’s also possible that rising interest rates may end up disrupting equity markets severely, destroying the wealth of better-off households.

“There’s no question that misery is going to increase, but it’s hard to say for who.”

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