The prices of a wide variety of goods have shot up in the past year, from homes and condos to renovations, grocery bills, gasoline and all sorts of manufactured goods that rely on components made in Asia, which is to say almost everything.
Early last fall, Statistics Canada reported that the September consumer price index (CPI) had hit 4.4 per cent compared to the same period a year earlier, levels not seen since the early 2000s. The figures varied significantly by region, from 6.3 per cent in P.E.I. to just 2.9 per cent in Saskatchewan, with energy prices contributing significantly across the board. The national averages, moreover, represented a steady climb in the monthly CPI rates since the beginning of 2021. “The very things that are driving inflation now are responding to 2020’s first and second waves of the pandemic,” says economist and policy advisor Armine Yalnizyan. “This isn’t normal inflation; this is supply shock inflation.” By comparison, she adds, inflation in 2020 hovered between 0.5 per cent and one per cent, reflecting the widespread demand destruction and job loss, especially among women, that marked the first half year of the pandemic.
Most economists acknowledge that this year’s inflation figures reflect a chaotic global economy that continues to battle COVID-19 on a range of fronts. For example, commodity and energy prices have risen sharply since the beginning of the pandemic. Many, in fact, wonder whether the recent inflation trends are cyclical and therefore transitory, or actually suggest a structural reordering that requires decision-makers to begin rethinking a library’s worth of assumptions and policies, some of them dating back decades. “This is pandemic economics,” says Yalnizyan. “The regular rules may not apply.”
“For the past 40 or 50 years, we’ve tended to view the economy through a demand-side lens,” adds Frances Donald, global chief economist for Manulife Investment Management. “What is so unique about this [period] is that it’s the greatest supply side shock since the 1970s.”
The pandemic caused an economic disruption. After two generations of trade globalization, global supply chains—built around low-cost manufacturing in Asia, just-in-time delivery and e-commerce—snapped when confronted by lockdowns that have closed major ports and factories and halted shipping. The billions in stimulus pumped into the economy, in the form of wage supports and subsidies for business, combined with elevated household savings rates, introduced an X factor in spending habits, marked by a dramatic shift from services (such as hair salons, home care) and activities (such as travel) to goods and investments. (Canada’s level of stimulus, measured as a proportion of GDP, is third among advanced economies, according to National Bank Financial.) Finally, the Bank of Canada’s ultra-low interest rates, as well as other monetary stimulus policies such as “quantitative easing” (the central bank’s purchase of corporate and government bonds), yielded billions of dollars in cheap credit that fired up housing prices.
So far, the labour squeeze hasn’t resulted in rising wages, but economists are certainly watching closely for evidence of this development. As a September TD Economics report observed, the relatively strong economic recoveries taking place in B.C. and Quebec could trigger wage-related inflationary pressure. Both provinces, TD notes, “appear to face more upside risks to inflation due to their sturdier economic recovery and tighter labour markets.”
The Bank of Canada, like other central banks, hasn’t yet offered any hints about whether it plans to revisit the core inflation targets that have driven its decision-making since the early 1990s. The bank’s governor, Tiff Macklem, has warned that rates will go up eventually, but not until circumstances in the economy warrant. “For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” he wrote in an op-ed in the Financial Times in mid-November. “We are not there yet, but we are getting closer.”
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Source: John Lorinc (2022). The Inflation Problem. Pivot, January/February 2022, 42-46.