The high inflation that we have forgotten in the last 30 years is back. According to Statistics Canada, it reached a level of 6.8 per cent between April 2021 and 2022, a height not seen since 1991.
While it was announced as temporary, inflation seems to not be going anywhere anytime soon. This has caused anxiety and many are now calling for swift action by the Bank of Canada. Although the latter has already raised its interest rate by half a point to bring it to 1 per cent, several analysts are now suggesting a further tightening of the monetary policy as soon as June 1.
As economists, we consider that this solution alone will be ineffective. It targets the wrong causes of inflation and, above all, threatens to penalize those who we are supposed to protect by causing an economic slowdown, job losses and an explosion of debt payments.
The Bank of Canada’s modus operandi is as follows: by raising its policy rate, it causes other financial institutions interest rates to rise. Confronted by higher borrowing costs, economic actors slows down some of their activities, which means fewer companies will invest, fewer people will buy houses, there will be fewer renovation projects and the idea of buying a new television on credit suddenly loses its appeal. This deceleration in economic demand should lead to downward pressure on prices. Looks easy, but the cost of such intervention is often economic stagnation, or even a recession and rising unemployment has we have experienced in the 80s and 90s.
A strong pill that does not target the actual causes
The Bank of Canada’s remedy seems ill-suited to the current situation. Today’s inflation is largely caused by circumstances that restrict the ability of companies to offer goods and services in as large a quantity as they did before the crisis and also increases to their production costs. Today’s inflation is not caused by an excessive demand or the strong public interventions during COVID.
Let us highlight four main causes: 1) global supply chain disruptions, that is exacerbated by the zero-COVID policy in China. A good example of that is the shortage of semiconductors that put pressure on production costs in the automotive industry. 2) The explosion of energy prices linked to the economic recovery and the war in Ukraine. 3) Explosion of food production costs caused by droughts, other climatic disturbances and in addition to Russia’s invasion of Ukraine. 4) Real estate speculation encouraged by the housing shortage.
In addition, another possible cause of inflation seems to be ignored: Could it be possible that some companies are taking advantage of the inflationary climate to raise their prices simply to increase their profits? The debate is going strong in the USA but we are still shy to bring it here. New data published by Desjardins shows that companies are generating earnings per share at a rate 30 per cent higher than before the COVID. This correlation does not prove that there is corporate opportunism, but in the context, this increase in profits should be examined.
Any policy response to inflation should aim at these factors. A over restrictive monetary policy could, in the end, only creates an unnecessary risk of recession.
As economists, we would like to remind you that the solutions put forward by our “science” are not neutral. The use of monetary policy to fight inflation roughly corresponds to a transfer of funds from the pockets of households to banks vaults and their shareholders. This solution entails a class bias. An aggressive intervention by the Bank of Canada would place the burden of the fight against inflation on the shoulders of the most vulnerable people. Those who are affected by an increase in interest payments: families who will renew or take out a mortgage, young people with student debt and small business owners. On the other hand, for large holders of financial assets, the rise in interest rates means that the value of those assets will be protected.
If the government really wish to protect the living standards of families, other strategies to slow price growth and raise incomes are available. it’s urgent to regulate some form of rent control, to finance vast social housing construction projects and to regulate short-term rentals for tourist. The provincial governments can reduce the prices they control: Hydro rates, tuition fees, childcare costs, public transit fares, etc. The government can subsidize self-sufficiency initiatives and diversification in the agro-industry, promote local short food channels and support the transition away from oil. It can substantially increase the minimum wage, adjust old age pensions and transfers to people living in poverty.
Today, tightening the access to credit is not the most effective way to fight inflation. It is time to put forward interventions that really help those affected by the rising cost of living.
We the following sign this letter in support:
Pierre-Antoine Harvey, economist, Centrale des syndicats du Québec
Marguerite Mendell, Professor emeritus, Concordia University.
Mario Seccareccia, Professor emeritus, Ottawa University
Joëlle J. Leclaire, Professor, SUNY Buffalo State University
Robert Chernomas, Professor, University of Manitoba
Paul Makdissi, Professor, University of Ottawa
Harold Chorney, Professor, Concordia university
Marjorie Griffin Cohen, Professor, Simon Fraser University
Louis-Philippe Rochon, Professor, Laurentian University
Larry Kazdan, CPA, CGA Vancouver
Marc-André Gagnon, Professor, Carleton University
Simon Black, Associate Professor, Brock University
Toby Sanger, Economist, Canadian for tax fairness
Angella MacEwen, Economist, Canadian Union of Public Employees
Simon Tremblay-Pepin, Professor, Saint-Paul University
Minh Nguyen, Socioeconomist
Eric Pineault, Professor, Université du Québec à Montréal
Mario Jodoin, Economist
Normand Pépin, Sociologist
Pierre Beaulne, Economist
François Bélanger, Economist, union adviser at Confédération des Syndicats Nationaux
Pierre-Alexandre Caron, Economist, Syndicat de la fonction publique et parapublique du Québec
Lise Côté, Economist, Fédération des Travailleuses et travailleurs du Québec
Ruth Rose-Lizée, Associated professor, Université du Québec à Montréal
François Desrochers, Public policy analyst, Alliance du personnel professionnel et technique de la santé et services sociaux
Bernard Élie, Associated professor, Université du Québec à Montréal
This letter was originally published in Le Devoir.
Support rabble today!
We’re so glad you stopped by! Thanks for consuming rabble content this year.
rabble.ca is 100% reader and donor funded, so as an avid reader of our content, we hope you will consider gifting rabble with a donation during our summer fundraiser today.
Whether it be a one-time donation or a small monthly contribution, your support is critical to keep rabble writers producing the work you’ve come to rely on as a part of a healthy media diet.
Become a rabble rouser — donate to rabble.ca today.
Nick Seebruch, editor
