Here are two things to keep in mind about the inflation rate, which Statistics Canada on Wednesday clocked driving nearly four times the posted 2-per-cent speed limit.
Thing One: A lot of current inflation is, like tomorrow’s weather, beyond the control of the Trudeau government or the Bank of Canada. Thing Two: The rest of the problem is homegrown – meaning that Canadian policy-makers have the tools to tackle it. Or to make it worse.
Start with Thing One. Nearly half of last month’s inflation is caused by “foreign” factors, according to RBC Economics. Oil is a global commodity whose price is set by global markets; so are most foods. Gasoline prices are up 48 per cent in the past year. Food prices are up 8.8 per cent.
Though oil and food prices lie largely beyond the reach of Chrystia Freeland and Tiff Macklem, there are many things that Canada, and individual Canadians, can do to reduce their dependency on volatile, globally determined oil prices.
For example, to the extent that Canadian drivers cut their gasoline consumption by driving less, or driving a more fuel-efficient vehicle, or going electric, they decouple from the main driver of current inflation. And the more Canada expands its electricity grid with zero-emission power generation, allowing more vehicles to become low or zero-emission, the more the country can lower both carbon pollution and lower dependence on volatile energy commodities.
But that’s a longer-term matter. In the short- to medium-term, the course of inflation depends on some things out of Canada’s control – and some things very much within our control.
If Thing One is that half of today’s inflation is imported, Thing Two is that the other half is domestically generated, and amenable to domestic solutions.
There are legitimate fears of a future recession, but that’s the opposite of what the Canadian economy is experiencing today. Stagflation? No, this is boomflation. Spending on goods skyrocketed during the pandemic; spending on services, such as travel and restaurants, has since caught up. Unemployment has never been so low.
That’s why the Bank of Canada is raising rates. To lower demand, it is in effect taking money out of Canadians’ pockets. Got a mortgage? Your monthly payments could eventually go up. A business that borrows money? That’s about to get more expensive, leaving you less likely to expand or take on new staff.
As the bank tries to moderate prices by lowering demand, politicians face public pressure to do the opposite. But governments increasing deficits, to finance sending cheques to voters, so that voters can spend more, is entirely counterproductive. It’s like trying to extinguish a forest fire with tiki torches.
Ms. Freeland has got this much right: Last week, the Finance Minister gave an anti-inflation speech that offered no new spending. No gas tax cuts, as in Ontario. No money mailed to voters, as in Quebec. No fighting fire with fire.
Could Ottawa do more? Yes. Thanks to boomflation, the deficit is contracting, but Ms. Freeland could pick up the pace. A deficit is borrowing from the future to spend in the present – and while that’s what was needed to fight the pandemic recession, it’s the opposite of what’s needed now.
There are two ways that Ottawa and the provinces can lower deficits to reduce fiscal stimulus. They can reduce spending – and Quebec’s bonus cheques, Ontario’s vehicle-licence rebates and Ottawa’s long-standing plan to give seniors aged 75 and up a big OAS boost should all be on the chopping block. Or they can raise taxes, since the problem isn’t government spending per se, but government spending that exceeds revenues.
At a news conference earlier this week with Ms. Freeland, U.S. Treasury Secretary Janet Yellen mentioned that one of the Biden administration’s deficit-reducing (and hence anti-inflation) proposals involves higher taxes on high-income Americans. Ms. Yellen understands the math better than most; she spent 17 years on the U.S. Federal Reserve, including four years at its chair.
However, Congress is not about to pass that into law. What it is instead going to do, at the behest of a President whose party is facing electoral disaster in November, is roll out a deficit-financed gas-tax cut. It will be politically popular. And it will stoke inflation.
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