Inflation Raises Temperatures – Writer’s Bloc

The summer heat isn’t the only thing making Canadians sweat this summer; abnormally high inflation and rising interest rates are putting pressure on many Canadians.

We went from zero inflation in August 2020 to 8.1% in June 2022. That’s really fast. The last time we saw anything like it was in 1970-73, when inflation jumped from 1% to 8% in three years.

It was a 360-degree head-turner, like The Exorcist, which also came out in 1973. Following this rise, inflation hovered between 6% and 13% for a decade, before finally breaking out of double crushing recession of 1980. and 1981.

So what do you do when inflation hits sickening highs? If you are the Bank of Canada, you are trying to suppress inflation by raising interest rates.

The problem is that the bank is using a very crude tool. If you’re hoping for a soft landing, I have bad news for you: it never worked.

Not once in 60 years has the Bank of Canada managed to reduce inflation by raising interest rates without causing a recession.

If a pilot says to me, “I’ve only attempted this landing three times in 60 years, and failed each time,” maybe he’ll land it this time, but it’s definitely not a plane I would like to be on.

But here we are, at a rather rare moment in history when rising inflation and rising interest rates are on a collision course.

What can you do? Flee to the coupon drawer for sales, maybe. Ask your boss for an 8.1% raise this year. Good luck with that.

When you think of inflation, what comes to mind is rising food and gas prices. The problem with gas prices is that most of what drives them is not determined here. They are based on the price of oil and the refining capacity of gasoline.

Oil prices are up due to Russia’s war in Ukraine, and refining capacity in the United States is down as several refineries failed to reopen after the pandemic.

The problem with interest rate hikes is that they won’t lower food and gas prices. They are more likely to cause a recession.

Controlling inflation with interest rates can work, but at a terrible cost. There are many other things to try if governments are interested.

Governments do not control the price of food and gasoline, but they do control other consumer prices. They have to exercise that control.

For example, the federal government can control who gets a mortgage to buy real estate. Let’s make sure real estate investors can’t get mortgages anymore. A house should be a house, not a proxy for the stock market.

Provinces control the rate at which rents are allowed to increase; let’s lock this.

Tuition, public transit and child care costs are part of inflation and are controlled by governments; let’s lower them. For example, cutting child care costs by 50% this year will make inflation negative for families with young children.

Governments can also help low-income households better cover rising prices. Remember the pandemic? The federal government made several one-time transfers to low-income families. These tools are already in place; reuse them.

Incredibly, most provinces do not adjust their low-income transfers for seniors and children to inflation. Virtually no province adjusts social assistance upwards to match inflation. It’s an easy fix.

It’s not the 1970s; pandemic-related initiatives have taught us a lot about the power of governments to act in times of crisis. Now is not the time to hit the snooze button.

David Macdonald is a senior economist at the Canadian Center for Policy Alternatives, a nonpartisan research institute.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.