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Home Canada

Inflation could be a problem for Canada’s economy — especially if we believe it is

MtR by MtR
June 22, 2021
in Canada
0
Inflation could be a problem for Canada’s economy — especially if we believe it is


First it was toilet paper, then it was masks and gowns, and lately, it’s lumber and computer chips.

And of course, real estate — wow.

Sudden, unpredictable shortages of the things we want most have been a hallmark of the pandemic economy, and a harbinger of inflationary pressure — to the point where financial markets, CEOs, politicians and consumers have all become alarmed about the value of money.

At its most basic, inflation is a sustained rise in a wide range of prices when too much demand chases too little supply. It becomes worrisome when it persists at a high level, eroding the value of savings and wages and distorting the way the economy works.

We’re not there — yet. And we won’t be if policy-makers are as attentive to the case as those who have a direct stake.

But markets are worried.

At Desjardins Capital Markets, for example, economists have long been issuing a regular “dashboard” of data to measure various impacts of the pandemic. After last week’s inflation report from Statistics Canada showed consumer prices in May had surged 3.6 per cent from a year earlier (far higher than the less-than-two per cent of the pre-pandemic days), chief economist Jimmy Jean and his team decided to put together the same kind of monitoring for inflation — a reflection, Jean says, that rising prices are a top concern in the reopening but also that details matter. A lot.

For sure, he says, some of the inflation is linked to the fact that a year ago, economies around the world were in lockdown and many prices fell. So of course, a year later, they show up in the data as much higher. Those “base effects” will pass soon enough. No worries there.

Gasoline is probably a case in point.

But Jean has his eye on other prices that are much higher now than a year ago because of global supply troubles. A year ago, many companies did what they usually do in a recession, and cut back production and investment in anticipation of a collapsing consumer base. Except this time, because of generous government supports in Canada and around the world, consumers were flush with cash.

“Instead of cutting production, they should have increased it. Ever since then, they’ve been trying to catch up,” he said. That’s not easy to do when your workforce is contending with pandemic restrictions and illness, Jean says, and as a result, prices have gone up in areas related to manufacturing, commodities and construction.

At the same time, no one could have predicted what the pandemic would do to the things people suddenly wanted. A global shortage of semiconductor chips, which are embedded in cars, appliances and other gadgets, is partly a result of an unexpected demand for all things electronic during the pandemic.

And lumber has taken on a life of its own, driven partly by a surge in home renovations and low interest rates fuelling a demand for houses.

The inflation in lumber prices appears to be waning quickly but it’s hard to know how long the chip problem will last. The toilet paper shortage of a year ago was resolved fairly quickly, but computer chips are far more complicated.

But there’s so much about inflation that has to do with our collective state of mind, rather than supply of semiconductors. Inflation really isn’t considered a huge problem for the broader economy unless wages start rising too, and labour demands compensation in anticipation of higher prices. That kind of spiral hasn’t taken hold — although the warnings of imminent labour shortages are loud, especially in the United States.

This is where policy-makers have a role to play. For consumers, labour and market players alike, expectations of inflation have as much impact on prices as global supply chains.

The Bank of Canada is reluctant to raise any red flags for fear of setting off a round of inflation jitters. But at the same time, politicians in Ottawa are deeply engaged in pre-election posturing and at each other’s throats. As a result, there’s a bitter political conversation around inflation that is not the least bit helpful, since it assumes and encourages the belief that inflation is out of control.

The Conservatives say rising prices are all Justin Trudeau’s fault because his government is running a huge deficit and has let the debt climb too high. A vote for Erin O’Toole would resolve it all, they say.

The NDP is invoking high inflation to demand the Liberals reinstate some enriched pandemic benefits, asking supporters to sign a petition to that effect.

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Of course, there’s the very real possibility that inflation could become dangerous as the economy opens up, with pent-up spending chasing around goods and services that haven’t caught up to demand. It’s definitely worth keeping an eye on.

But if there’s a government policy that could have an effect on global supply chains and business investment that would allow companies to match supply and demand, it would involve a lot more than electioneering.

It would involve a frank conversation about the intricacies of inflation, the troubles with supply chains and a concerted effort by the public sector and private sector alike to work out all the kinks. Opening the border is only a start.

Heather Scoffield

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