It has been decades since inflation was raised as an election issue. That’s because it has been extremely low for the past 30 years: less than 2 percent since 1991 when the Bank of Canada adopted it as its official target.
But the non-issue also reflected an unwritten agreement among politicians that it was not Parliament’s place to manage monetary policy. Rather, it is better to leave it to the technical experts of the central bank. Indeed, in the 2011 campaign, Conservative leaders (including Stephen Harper and Jim Flaherty) scolded the NDP’s Jack Layton for raising monetary policy as an issue. Flaherty called it “amateur hour.”
However, this time the hands-off approach has been abandoned. Instead, outspoken Conservative MP Pierre Poilievre has been vehemently attacking the Liberal government and the Bank of Canada – accusing the latter of serving as Mr Trudeau’s ATM for funding large pandemic spending. And the official Orthodox campaign has taken up this crusade. Leader Erin O’Toole denounced “Trudeau’s inflation”, blamed the printing of Ottawa money, and pledged to wrestle prices back down.
The latest inflation numbers, released Wednesday by Statistics Canada, are throwing gasoline on this political fire. (Incidentally, gasoline has been the biggest source of higher prices!) Inflation hit 4.1 percent year-on-year in August.
Is this a matter of concern? Let’s look at the math and politics of inflation to see if it’s worth noting – and evaluate the promises of the parties concerned to bring inflation under control.
The best inflation rate is not zero
Economists have learned that a slight inflation lubricates the markets and helps the economy adjust. Our Bank of Canada thinks 2 percent is best. It is a goal, not a maximum. It is as bad when inflation is below target as when it is above – although politicians don’t pay as much attention. In the past decade, inflation in Canada has fallen twice as often as it has risen above the target.
Inflation did not increase as much as it reversed
Much of the current rise in inflation is a statistical fallacy. Prices actually rose more slowly in August than in previous months. But Statistics Canada reports inflation on a year-over-year basis: comparing prices this August to where they were last August.
In addition, consumer prices declined during the first months of last year’s pandemic. Therefore higher inflation in the subsequent 12 months only compensates for weak (or negative) inflation in the previous period. For two full years, inflation was 2.1 percent — almost exactly on target.
reopening after COVID
Some of the price increases we’ve seen for specific products and services (such as restaurants, hotels and some retail) clearly reflect short-term pressure from thousands of businesses reopening simultaneously. We have never experienced a sudden supply disruption of that magnitude, and it should be expected that some temporary disruptions will occur.
Inflation is a Granthshala trend
Countries around the world are experiencing higher prices as companies reopen, consumers spend more, and rebuild supply chains. In the US, inflation is currently 5.3 percent higher than in Canada. However, most economists see this as a sign of recovery and not a coming crisis. And the expectation of financial markets (reflected in bond yields) is that inflation will return to around 2 percent within a year.
Whether inflation is a real problem or not has definitely become an issue in this election campaign. So what are the major parties proposing to do about it?
The Conservatives have emphasized inflation, but curiously, neither “Bank of Canada” nor “monetary policy” even appear in their 86-page forum. The most specific recommendation regarding inflation is to expand access to subsidized mortgage insurance, linking it to home price inflation (liberals have a similar promise). But this can raise home prices, not lower them.
Perhaps it is safe for the party to clarify the specifics of monetary policy – because if conservative threats about cracking down on inflation (and the Bank of Canada) were taken seriously, it would disrupt financial markets and the party’s entire economic narrative. will weaken it. If the O’Toole government did indeed order the Bank of Canada to stop “printing currency” (by undermining its quantitative-easing policy), interest rates would rise, house prices would fall, and bond markets would collapse. will be thrown into confusion. In the US and other countries, even phasing out QE-affected markets are being considered. So in fact, ordering the bank to close could trigger a full-blown crisis.
Other major parties are also mostly silent on monetary policy. Only the NDP also mentioned the Bank of Canada, which it says should help finance climate investments. All three major parties address specific affordability issues – such as the NDP’s pledge to cap cell phone bills, the liberals’ plan to review bank fees or the conservative proposal to invite foreign telecom providers to Canada. All of those measures can be debated, but none will have a measurable effect on overall inflation.
That’s why voters should probably ignore Canada’s rising inflation all summer long. In fact, it refers to Granthshala and macroeconomic factors over which the government has little control. And while critics call it “Trudeau’s inflation” today, it will eventually have to be renamed after the next resident of 24 Sussex Drive.
Jim Stanford is an economist and director of the Vancouver-based Center for Future Work.