Governor of the Bank of Canada Tiff Macklem, on July 12.Ashley Fraser/The Globe and Mail
Todd Hirsch is a Calgary-based economist, author and public speaker. He is also the director of the Energy Transition Centre and the former chief economist of ATB Financial.
The term “stagflation” started circulating back in the 1970s to describe the torturous concurrence of both a stagnant economy and high inflation. The phenomenon was eventually eradicated in the eighties and nineties, and economists had long thought it was finally and forever relegated to the history textbooks.
But like a mutating virus, a new strain of stagflation may be back in the 2020s, and this time with even more punch and stronger resistance to the vaccine of higher interest rates. Three factors in 2024 will continue to spur prices higher – all to the chagrin of the Bank of Canada.
The first factor is the price of oil, which, one way or another, eventually affects the price of everything else. From direct effects on vehicle gas to indirect effects on prices of consumer items that are transported by truck, rail or air, oil still literally fuels the global economy. That dependence may be changing in the coming decades, but for the near term, oil affects inflation more than we want to admit.
And oil prices have been on the rise. West Texas Intermediate is above US$90 a barrel – more than 10 per cent above a year ago, and up from US$67 earlier this summer. That will continue to press consumer prices through 2024. Moreover, many analysts expect oil prices to rise above US$100 a barrel by the end of the year, spurred on by demand from China and production cuts in Russia and Saudi Arabia.
The second factor pushing inflation higher is global geopolitics. The trade embargoes against Russia have not hurt Canada too much because we don’t trade a lot with the country. But tensions are worsening with China, and our relationship with India is collapsing by the minute. These are countries with which we do have considerable trade. And the BRICS (Brazil, Russia, India, China and South Africa) grouping has been busy adding members to its sphere of influence: Saudi Arabia, Argentina, Egypt, Iran, Ethiopia and the United Arab Emirates.
This new BRICS+ is not a trade bloc, to be sure. But the world is bifurcating into two spheres of political and economic influence. The G7, led by the United States, represents a little more than a quarter of global GDP, and about a tenth of the world’s population. The BRICS+, however, accounts for 30 per cent of GDP and nearly half (46 per cent) of the world’s population.
If our political and economic relationships with these countries continue to worsen, Canadian manufacturers, investors and consumers might be forced to look closer to home for their purchasing and investing opportunities (the so-called “friendshoring”). That will reduce economic efficiency and cost consumers more.
The third factor is climate change and the extreme weather events that have been plaguing the Earth. From more devastating hurricanes and forest fires, to more disastrous floods and droughts, all of it is costing us more.
The direct added costs of more severe weather are replacement costs of buildings, the loss of crops and food supplies, and the lost GDP from disruptions to regular business activity (for example, you can’t transport your goods across the country when the rail lines have been washed away). The indirect costs are the higher insurance premiums that homeowners and businesses are facing. All of it is contributing to higher costs for manufacturers, farmers and other businesses, and that will eventually trickle down to consumers.
Higher oil prices, possible trade and investment disruption, and more severe weather events – these are the new and more-sinister forces that will drive consumer prices in the coming years. And actions from the Bank of Canada and other central banks will be completely ineffective at fighting them.
Inflation has been falling over the past several months, and that’s been encouraging. But don’t expect the bank to let up on interest rates any time soon. Even though higher prices won’t be a result of rising wages or excess consumer spending, the bank will continue in its determination to wrestle inflation back down to two per cent.
Yet even as the Canadian economy is whipped into submission with higher borrowing costs, the external factors highlighted here will continue to stimulate inflation all the same. Far from having been eradicated altogether, stagflation might be morphing and mutating and staging a comeback in 2024.
It may take more than several vials of traditional monetary policy to fight it this time.