NEWS FROM "THE HOUSE TEAM"

Alberta's hot inflationary pressure is surprisingly well contained, and there's little threat it will spill over into the rest of the country, says Bank of Canada Governor David Dodge. "We've been pleasantly surprised," Mr. Dodge told The Globe and Mail in an editorial board meeting yesterday. "We might have expected -- and certainly our models would have called for -- higher wage growth."

Prices in Alberta rose 4.7 per cent in December from a year earlier: A much higher inflation rate than the national average of 1.6 per cent, and well above any other province. (British Columbia takes second place at 2.1 per cent.) And Alberta's inflation rate has been consistently higher than the rest of the country for about three years.

"Based on historical experience, that the pressures that have been in Alberta since 2003, by now we would have been seeing much more spillover into the rest of the country. That's exactly what we saw in earlier periods," Mr. Dodge said."What is quite clear is that quietly, our labour markets, and indeed our product markets, really have become quite a bit more flexible over the last 30 years. And so despite the
huge pressures that we have in the Alberta market, it really hasn't spilled very much into wage pressures in the rest of the country, except in the cases where we have shortages in particular skills."
When the central bank saw wages rising steadily at the beginning of 2006, it expected the momentum to continue and spread, Mr. Dodge added. But instead, wage pressures dissipated in the latter half of the year.

Asked whether he thinks inflationary pressure will remain contained in the oil-rich province, Mr. Dodge said: "I would say that I'm reasonably optimistic in that regard." The comments suggest that there's enough slack in the rest of the country to accommodate Alberta's overheating economy, said Michael Gregory, a senior economist
with BMO Nesbitt Burns Inc. He, too, has been surprised by the lack of spillover effects from Alberta's high inflation, especially since central bank officials had indicated last year that they were quite concerned about the potential for contagious rising wages and prices.

The recognition by the Bank of Canada that Alberta's inflation may well be contained suggests that the central bank forecast for benign inflation is probably a safe bet. Still, he added that he is wary about the inflationary effect of the depreciating Canadian dollar on import prices. And he's also worried that rising grain prices will feed into
Canada's consumer price index. In a speech and press conference yesterday, Mr. Dodge indicated that he was keenly watching for any sign of upward pressure on inflation -- whether those signs come from
wage data, labour market reports, or the bank's own surveys of businesses.

All told, the upward and downward pressures balance out, he said, and inflation is expected to stabilize at about 2 per cent soon -- an indication the bank's key interest rate, which has been on hold since last May, will likely remain at its current 4.25 per cent for some time to come."Governor Dodge did not deviate from the opinions expressed [in his economic update last week], virtually squashing expectations of a rate cut this year," said economist Meny Grauman with Bank of Nova Scotia.

Mr. Dodge reiterated that growth in Canada's economy was quite sluggish in the fourth quarter of 2006, but should pick up throughout 2007 and 2008. That's because the global economy is strong, and the steep downturns in the U.S. housing and auto sectors appear to be abating, he said."We are seeing what we think will be a cyclical recovery of demand for our products as we work through 2007," he told a business audience in downtown Toronto.

The worst-case scenario is that the U.S. recovery does not unfold as he hopes."We might have a situation where the American consumer doesn't want to build a third garage and put a vehicle in that garage," he said. If that kind of consumer retrenchment coincides with lower U.S. government spending, the strength of Canada's economy could be at risk, he said, especially if consumption in Asia and the Middle East does not pick up."That could be a real problem." However, such a scenario is not likely, he added.