Is there a made-in-Canada solution to high inflation?

Posted on January 1, 2022 in Debates

Source: — Authors: – Opinion/Contributors
Jan. 1, 2022.   By Sheila Block, Bernard Blum, Walid Hejazi, Contributors


Sheila Block, Senior economist

It’s 2022 and pandemic-weary Canadians are worried about inflation.

In November, consumer prices were up 4.7 per cent compared to a year earlier, fuelled by sharp increases at the gas pumps and the grocery store and the cost of homes and cars.

Some critics blame this increase in prices on government spending during the pandemic. Their solution is to cut spending, hike interest rates, and slow down the economy.

This is a bad idea; it would reduce employment and economic activity at a critical moment in the recovery. Just as importantly, it won’t work, as it doesn’t address the underlying causes of rising prices.

To tackle inflation, governments must do two things: focus on what is causing it and support those most affected by it.

Lawmakers need to understand that inflation is being driven by three things: rampant speculation in the housing market, a volatile global oil market, and supply chain disruptions.

First, the housing market: While many Canadians are desperately searching for a home they can afford to buy and live in, others see housing as an investment only. In the first half of 2021, 25 per cent of homes sold in Ontario were bought by investors who didn’t need a place to live. In theory, building more new houses should cool down house prices, but in practice, that won’t happen when an investor can own 10 of them. If we want to curb inflation in the housing market, ending unproductive speculation — through the tax system or otherwise — is something we could do very quickly.

Second, oil prices: The leading driver of inflation in Canada today is the price of gasoline, which is tied to the world oil price. Oil prices are tied to global politics and global markets and are notoriously volatile. That’s one more reason moving to a low-carbon Canada is a good idea (see below).

Third, supply chain issues: Today’s global economy is built on low-cost oil and high technology. The former allows millions of items to be made cheaply, in places where labour and environmental protections are weak, and then shipped halfway around the world; the latter allows supply chain experts to ensure that goods are delivered “just in time” to reduce inventory costs.

The pandemic has exposed the fragility of this model. Long, tightly integrated supply chains are vulnerable to disruption. Disruptions lead to shortages. Shortages push up prices.

But the end of the pandemic, when it comes, won’t be the end of supply chain disruptions. We have entered a new era.

Photos of British Columbia after torrential rains in November are photos of the future. The rains erased roads and railways. They shut down the biggest port in Canada. They disrupted the flow of goods and people. The B.C. government brought in gasoline rationing.

This followed a summer where a drought on the Prairies pushed up the cost of livestock feed, which pushed up the price of meat in an industry where just two companies process 95 per cent of Canada’s beef in only three plants.

Fires, floods, storms, and droughts will shape our future from now on. They will disrupt supply chains and hike prices on a routine basis.

Rebuilding or moving after a disaster will become a normal feature of Canadian life. We will need to rebuild and reinforce public infrastructure more or less constantly. We will need to shorten supply lines for basic necessities. We will need to support people who didn’t need support before. And we will have to do all this while making investments to wean ourselves off the fossil fuels that are causing the crisis in the first place.

All of this will cost money, including public money. Spending less will not be an option.

Inflation and the pandemic have a lot in common: both attack household incomes, both hit low-income households hardest, and both demand government action to support incomes. Social assistance rates must rise, as they should have years ago. Minimum wages must rise. Federal transfers to low-income Canadians should increase.

Painful 20th century policy prescriptions to cut inflation by squeezing the life out of the economy, through increasing interest rates and reducing government supports, are no answer to our 21st century problems. They will only make our problems worse.

Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office.



Bernardo Blum and Walid Hejazi, Rotman School of Management

One of the key themes we teach at the Rotman School of Management is how harmful high inflation is for an economy. High inflation creates a drag on economic growth, and results in significant distributional impacts across different segments of the population. It is those most vulnerable in society who are most negatively impacted by inflation.

The realization of the costs associated with inflation pushed central banks around the world to adopt low and stable inflation policies. In Canada, that means a target inflation rate in the range of 1 to 3 per cent. This low and stable inflation policy has been successfully implemented for the past 30 years by the Bank of Canada. And the policy was renewed for another five-year term in November.

To understand whether Canada can impact current inflation levels, it is important to comprehend the distinction between a change in price levels and inflation. Prices in a country may change from a lower level to a higher level. Inflation, however, refers to the rate of change in prices.

Our view is that the pandemic is the origin of the increases in prices currently experienced in Canada. The pandemic resulted in massive disruptions to all economies around the world. The demand for many products fell dramatically, while the demand for other products increased.

In response, production around the world declined for many products and, because of the pandemic, did not respond adequately for products seeing a demand increase. As demand has rebounded, supply has been slow to respond. As a result, prices in Canada have gone up and, during this period, the rate of change in prices (inflation) went up as well.

Indeed, there have been seven straight months of inflation increases. In October, CPI inflation hit 4.7 per cent and the core inflation, which is targeted by the Bank of Canada, hit 3.3 per cent. Inflation has therefore risen to levels not seen in decades. The question then becomes, short of creating a recession, is there something that can be done in Canada to deal with the current inflation?

The answer is no, there is not. The reason is that what the Canadian economy is experiencing is an adjustment in price levels driven by the pandemic. The sources of these price changes are outside the control of any Canadian policy-maker, and hence there is no Canadian solution.

Disruptions caused by the pandemic are clear. Every day we hear about significant supply chain challenges affecting the global economy, resulting in higher prices for many goods, including new and used cars, but also aluminum cans and other inputs used in many of the products we buy. These supply chain challenges are global and their solution is not addressable by any one country alone.

The cost of operating for many businesses have increased as well. There are new protocols in place for physical barriers, physical distancing, more regular cleaning, and in many cases limited capacities. These have increased costs, which must be borne by businesses or consumers. To the extent that they are borne by the consumer, this will cause higher prices. These effects are also not addressable by anyone country, as all countries working to limit the spread of COVID have similar policies, and hence inflation challenges.

Reports of labour shortages occupy the news channels on a daily basis, and businesses report having to pay higher wages to attract workers back into the labour market.

All of these examples have resulted in an increase in prices levels, and this explains why the inflation rate in Canada has increased for the past seven months. Higher inflation rates have also been experienced in other countries, as they, too, are experiencing the same COVID-related disruptions.

Once we move into a post-COVID world, prices will once again adjust to reflect the costs associated with doing business in that new environment. It is only then that the inflation pressure we are experiencing now will recede.

As COVID dissipates, so, too, with the inflation that came with its disruptions, and inflation should also return to levels that are deemed acceptable.

Bernardo Blum is director of the Institute for International Business and associate professor of Economic Analysis and Policy at the Rotman School of Management. Walid Hejazi is associate professor of economic analysis and policy and a fellow of the Michael Lee-Chin Family Institute for Corporate Citizenship at the Rotman School of Management.

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