Taming the Inflation Monster – Smithers Interior News

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After becoming accustomed to a long period of relatively low and generally stable inflation since the mid-1990s, Canadians are now grappling with a worrying and unexpected rise in the consumer price index (CPI) .

Price pressure began to build at the start of last year and inflation has been accelerating ever since. In April 2022, total CPI inflation in Canada stood at 6.8%, which means that the overall cost of living is almost 7% higher than the previous year. Inflation is expected to rise slightly in May, partly due to the continued rise in fuel prices.

To buy the same basket of food, energy, housing and transportation services, and other consumer goods that cost $100 a year ago, Canadians now have to pay $107. This figure is expected to reach at least $110 by the end of 2022, as there are few signs of slowing inflation.

Three factors help explain the price spike that Canadian households and businesses are currently facing.

The first is the series of “supply shocks” triggered by the current global COVID-19 pandemic and, more recently, Russia’s invasion of Ukraine. These have disrupted manufacturing supply chains (particularly those linked to China), fostered turmoil and price escalation in energy markets, and driven up the cost of transporting goods.

The Russian-Ukrainian war has fueled the pre-existing problem of inflation by reducing agricultural production and exports from these major food-producing countries.

The second contributing factor is the stimulative monetary policy adopted in much of the world since the global financial crisis of 2008-09 – a policy stance which received further impetus when central banks cut short-term interest rates to close to zero and pumped large amounts of money into the financial system when COVID-19 arrived in early 2020. In Canada, nearly two years of record low borrowing costs fueled frenzied activity on housing markets, led to dramatic increases in house prices and encouraged consumers to accelerate purchases of big-ticket items. items – all of which made inflation worse.

Finally, in some jurisdictions, including Canada, government fiscal policies have also helped propel inflation. When COVID first hit, governments appropriately provided generous financial support to workers and businesses affected by restrictions introduced to contain the virus.

This resulted in huge public deficits. However, the economy rebounded rapidly in the second half of 2020, with the positive momentum extending into 2021. Canada and British Columbia saw economic activity more than fully recover from the brief recession in the COVID of 2020, and the job market is tight.

Despite presiding over a booming economy amid soaring inflation, the federal government still projects a hefty $50 billion deficit for the current fiscal year, while the Horgan government projects $9 billion. additional red ink. It is difficult to see any justification for large public deficits in the current macroeconomic climate.

While governments are spending as if the economy is still moribund, the central bank is now arranging major interest rate hikes to moderate demand and hopefully stem inflation. Fiscal and monetary policies are at loggerheads, suggesting that interest rates may need to be pushed even higher as the Bank of Canada acts to tame the inflation monster.

How will all of this affect consumers? Those looking to secure new mortgages or renew existing mortgages will find that borrowing costs are significantly higher than 12 or even six months ago. Auto loans and prime rates have also increased and will likely continue to do so for some time to come.

On the other hand, long-suffering savers can expect slightly better rates on savings accounts and GICs. However, with the consumer price index climbing at an annual rate of 6-7%, savings and investment products offered by financial institutions are still generating deeply negative returns when measured after inflation. . And even workers who receive raises will find that their “real” earnings fail to keep up with the rising cost of living.

Canadian policymakers should support the Bank of Canada’s efforts to bring inflation back to the long-standing 2% target that the Trudeau government reaffirmed last year. In the meantime, if politicians want to help consumers weather inflationary storms, one easy option is to introduce temporary fuel tax cuts – even if such a move would add to short-term government deficits.

Jock Finlayson is Senior Policy Advisor at the Business Council of British Columbia.

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