The pandemic wound down in the spring, or at least, it offered a reprieve. As it faded, inflation increased. Why? The economy rebounded strongly, and soon demand for goods and services overtook the ability of the economy to supply them. The result is inflation. The Consumer Price Index (CPI) increased in 2021 from 1% in January to 4.8% in December. In the first six months of 2022, it increased from 5.1% to 8.1%. By September, the CPI had decreased to 6.9%, largely due to lower oil prices.
Grocery prices, however, continue to surge. Over the last ten months straight, food inflation has exceeded all-items inflation. In September, the increase in food prices registered at 11.4%, the highest rate in forty-one years. Over the last 12 months, coffee and tea increased by 16.4%, bakery items by 14.8%, fresh vegetables by 11.8% and meat by 7.6%.
Leslie Harris, Chief Economist at the TD Bank, told the Toronto Star, “It’s really sort of a perfect storm. A weaker exchange rate, higher transportation costs and higher commodity prices all get passed along to the price of food we buy.” Initially, creating the escalating transport and commodity costs were supply chain problems, then the rising cost of oil, in turn, due to the war in the Ukraine and OPEC’s restriction of the oil supply. All these factors contributed to both food inflation and all-items inflation.
Another significant cause was stimulative monetary and fiscal policy throughout the pandemic. Jack Mintz of the Macdonald-Laurier Institute, observes, “Inflation hurts. So do higher interest rates. And they aren’t solely due to circumstances beyond our control. Our own excessive spending is mostly responsible.” Mintz cites a study of government spending and money supply in 15 countries. In 2020, Canada and the US topped both categories, and later showed amongst the highest inflation rates of all 15 countries, 6.9% and 10.1% respectively, for the 12 months ending September 30, 2022.
Clearly, the Bank of Canada could not foresee the impact of all the events, but some were already solidly entrenched last year. The economy was nearing full capacity, and CPI was well above the Bank’s target level of 2%. Yet, the Bank continued to see inflation as “transitory”. The first interest rate increase came March 1st, 2022. The stimulative quantitative easing policy continued through most of 2021, and quantitative tightening only began in April of 2022. Why did the Bank of Canada not act sooner?
David Parkinson of the Globe and Mail, argues that a key measure of core inflation the Bank uses is broken. CPI-common, used to approximate how close the economy is to full capacity, was spitting out, “dangerously misleading garbage”, says Parkinson. Unfortunately, he recounts, the Bank only recognized this six months after it should have begun raising rates. The problem was almost certainly more complex than the CPI-common alone, but it was an important factor. On October 6, the Governor of the Bank confirmed it is subject to large historical revisions, so “we are reassessing CPI-common”.
The Bank of Canada, on October 25, increased its overnight target rate by 50 basis points to 3.75%. The Bank’s Monetary Policy Report (MPR) noted that the effects of previous rate increases had become evident in housing activity and business and household spending. “Economic growth is expected to stall through the end of this year and the first half of next year,” read the MPR. The Governor of the Bank, Tiff Macklem, added we will see, “growth essentially zero for the next several quarters”. The Bank predicted annual growth of 3¼% in 2022, near 1% in 2023 and 2% in 2024.
The Governor also noted that inflationary pressures remain broad based throughout the economy. He predicted inflation of 7% for the final quarter of this year, 3% by the end of 2023 and 2% by the end of 2024. He somewhat positively observed, “We are getting closer to the end of this tightening phase, but we’re not there yet.” Scotiabank is forecasting the overnight target rate at the end of 2022 at 4.25%, at the end of 2023 at 4% and at the end of 2024 at 3%.
So, there is some hope on the economic horizon for moderating interest rates and economic conditions. The Bank of Canada is reasonably optimistic, predicting a short and limited decline in GDP, and a relatively short bout of high inflation. The Bank has lost some credibility over the last year, but its current forecasts seem to be comparable with those of the private sector.
Bruce W Uzelman
I grew up in Paradise Hill, a village in Northwestern Saskatchewan. I come from a large family. My parents instilled good values, but yet afforded us, my seven siblings and I, much freedom to do the things we wished to do. I spent my early years exploring the hills and forests and fields surrounding the village, a great way to come of age. My parents owned a successful general store. My siblings and I were required to help out in the business, no choices allowed there!
I attended the University of Saskatchewan in Saskatoon. I considered studying journalism at one point, but did not ultimately pursue that. However, I obtained a Bachelor of Arts, Advanced with majors in Economics and Political Science in 1982.
My career has consisted exclusively of small business, primarily restaurant and retail. I was originally based in Alberta, and then BC, first in Summerland, then Victoria and finally Kelowna (for over 20 years). I was married in Alberta, and we have two daughters, who have returned to Alberta as adults for career reasons, as did my now ex-wife. My daughters are successful, and now have families of their own.
I have maintained a healthy interest in politics throughout my adult years, and wish to put that and my research skills to work as a political columnist.