Political rhetoric on inflation out of touch with reality, experts say
Prices in Canada are rising — and they are rising rapidly.
Statistics Canada released its measure of inflation, the Consumer Price Index (CPI), earlier this week. He reported that prices are now 6.7 percent higher than they were at the same time last year.
This is the largest increase in the CPI since January 1991, the year the government introduced the GST.
“Prices rose amid sustained pricing pressure in Canadian real estate markets, significant supply constraints and geopolitical disputes, which affected energy, commodity and agriculture markets” , said Statistics Canada.
The Bank of Canada raised its benchmark interest rate by half a point to 1%, citing the need to curb inflation. Bank of Canada Governor Tiff Macklem has not ruled out further increases.
The rising cost of living has caught the attention of many prominent politicians. But is everything they say about it true?
Does the federal government cause inflation?
Conservative leadership candidate Pierre Poilievre, a former finance critic widely seen as the frontrunner in the race, has made inflation a central part of his campaign.
Poilievre says the Trudeau government’s approach to spending and taxation is a major driver of inflation.
“Trudeau’s big spending, deficits and taxes have driven up inflation, which in turn is now driving up interest rates,” Poilievre said in a recent press release.
“I would reverse JustinFlation with common sense policy including: removing the carbon tax, phasing out inflationary deficits by ending wasteful spending and rolling back new promises and removing gatekeepers to make more of what money buys – energy, food and shelter.”
Is Poilievre right? Is the government’s fiscal policy driving up prices?
Jean-Paul Lam, professor of economics at the University of Waterloo and former deputy chief economist at the Bank of Canada, said government spending is one of many factors pushing prices higher, but that are relatively modest.
Pandemic-related economic support programs are a big reason why the federal deficit is so large now; the deficit was projected at $53 billion in the last budget. But that’s not enough to explain the rate of inflation we’re seeing right now, he added.
“It’s a minor factor…I don’t think the government’s fiscal position, although it has deteriorated significantly over the past couple of years, is a key driver of inflation right now,” he said. he declared.
Trevor Tombe, an economics professor at the University of Calgary and a research fellow at the university’s School of Public Policy, said Poilievre was right in that government spending and taxation can be a factor in inflation.
“Fiscal policy can indeed have an impact on the price level if central banks do not react to this spending,” he said.
But the federal government’s spending and tax decisions have little to do with the other larger forces pushing prices higher, he said.
“It doesn’t matter what the Canadian government spends. Oil prices will go up and down due to much larger global forces beyond our control,” he said.
“And even with house prices being as high as they are, it’s not just a Canadian phenomenon. And we’re seeing house prices go up by about the same amount in the developed world as they are here. in Canada.”
What about those big corporate profits?
NDP Leader Jagmeet Singh took to Instagram on Wednesday to talk about the rising cost of living.
He argued that inflation was not fueled by supply problems or government stimulus programs, but by big business seeking to boost profits.
“It’s because of greed,” Singh said. “When the cost of things goes up, it hurts some people, but it benefits those at the top.”
There is some truth in the picture painted by Singh, Lam said.
The pandemic has wiped out many small businesses, which means some larger companies now face less competition. Companies often raise their prices when this happens, he said.
Some companies also faced rising costs for raw materials and supplies, he said, and passed those costs on to customers by raising prices.
But that doesn’t mean Singh’s reasoning is valid, he added.
“I think it’s a bit too simplistic in terms of [an] explanation for inflation,” Lam said. Pricing decisions made by companies are now largely responses to inflationary pressures from other factors, such as global supply constraints, he said.
“This is, again, an example of political language oversimplifying complex issues like inflation,” he said.
Tombe mentions the auto industry, where a severe shortage of auto parts has reduced supply and driven up prices, but not necessarily profits.
“And so there are a lot of factors here that have nothing to do with greed, with market power, with corporate profits,” Tombe said.
Both Lam and Tombe, however, said Singh hit on an important point: inflation does not affect everyone equally.
The well-to-do don’t necessarily benefit from inflation – prices rise for everyone, including the rich – but the poor find it harder to afford more expensive essentials. The price of groceries, for example, rose 8.7% from a year ago, according to the CPI.
And those who own certain types of assets can benefit from inflation if the value of what they own increases. Real estate is a good example, Lam said.
What about the Bank of Canada?
The bad news for people in financial difficulty may not end in higher prices, Lam said.
Canada’s central bank is likely to keep raising interest rates to fight inflation, he said. This means that debt service will be more expensive.
“So you can see that young people who are just entering the housing market, people who have a lot of debt and are facing high mortgage debt, they are the ones who are going to suffer disproportionately compared to people who have a huge amount of wealth,” Lam said.
The Bank of Canada has also been in Poilievre’s sights. He criticized its approach to monetary policy and accused it of boosting inflation.
Tombe said that while Canada’s central bank hasn’t always worked flawlessly, it would be unfair to expect perfection given the unprecedented turmoil the global economy has faced in recent years.
“While I think, in retrospect, central banks should have tightened earlier, I don’t think that means they made a mistake given what they knew at the time, and given what was reasonable and all the uncertainties involved,” he said. mentioned.
Lam’s assessment of the bank’s response to inflation is less forgiving.
“I think they’ve been very slow to respond to inflation,” he said.
“Their main message was, ‘Don’t worry, it’s transitory. It’ll come back to 2%, etc.’ I think they made a mistake by sticking to that message for too long.”
So what is fueling inflation?
If the federal government, big business and the central bank are not the main culprits, what is causing the price spike?
The answer to this question can be frustrating for government – and for those seeking to lead it, like Poilievre and Singh. This current wave of inflation is primarily the result of global supply chain issues and geopolitical tensions – things over which Canada has little influence.
The Russian-Ukrainian war affected energy and food prices. Supply chain issues — particularly in China, thanks to pandemic restrictions — are major factors, Lam said.
Demand for goods and services is also higher right now than many analysts predicted at the start of the pandemic, he added.
“I think the bad news for Canadians is probably [inflation] going to increase in the coming months,” he said.
Lam said raising interest rates is the most effective way to reduce inflation, but it will be a difficult balance for the Bank of Canada to strike.
Tombe agreed with Lam’s assessment of Canada’s vulnerability. As a small trading nation, he said, Canada is exposed to global supply and geopolitical shocks, but has few tools to fight back.
The situation calls for a cautious approach, he added.
“We don’t want to overreact to potentially temporary factors,” he said.
“If energy prices don’t continue to rise, if house prices don’t continue to rise at the rapid rate we’ve seen, then inflation should return closer to what we consider normal more late this year and early next.”