Inflation in Canada is higher than normal right now. As workers, understanding the reasons for higher prices helps us push for real wage increases at the bargaining table.
The Bank of Canada tracks many economic indicators, like unemployment and levels of business inventories, to understand what might be causing changes in prices now and in the months to come. Changes in Bank of Canada policy take a long time to impact the economy, typically around two years, so they pay more attention to long term trends.
Policy-makers will respond to price increases in different ways, depending on the cause. Temporary increases in some prices don’t always lead to permanent increases in the overall level of price. For example, the temporary chip shortage is affecting toys, cars and other consumer goods, but won’t last. Monetary policy is only helpful in addressing long term changes in price levels that are the result of domestic economic capacity shortfalls or overheating.
There are three main causes of the higher-than-normal inflation that we’re seeing in Canada right now: global supply chain disruptions, a temporary increase in pent-up demand for items that weren’t available during the pandemic, and widespread droughts affecting agriculture output.
Global supply chain disruptions have continued for longer than expected, but they should resolve within the next year. Overwhelmed ports and delayed shipping have been affected by a continued COVID-zero policy in China that is affecting production of many manufactured goods. This policy is expected to continue at least until after the 2022 Olympics.
Not only are these changes temporary, adjusting Canadian monetary policy would not improve the situation. These are global problems that require global coordination to resolve, such as climate action to reduce the impact of climate change on our food supply. Raising interest rates now would only slow our economy at exactly the same time that governments are withdrawing historic levels of fiscal stimulus.
What does this mean for workers? It will be especially important for workers to bargain cost of living increases to their wages, and to push back against claims that wage increases will add to existing inflation. When workers have enough money in their pockets to meet their basic needs, their local economies benefit.
Evolving views on inflation
In the 1970s, many economists thought the only cause of inflation was too much money in the economy chasing the existing supply of goods and labour. Central banks set their policy to match the increase in the money supply to expected economic growth. Canada adopted this approach, called monetarism, in 1975. Limiting the growth in the money supply using the rules of monetarism brought inflation back under control, but led to devastating economic recessions, as investment by businesses and governments fell at the same time.
Central banks began to realize that the link between economic growth and the money supply was more complicated, and by 1991, the Bank of Canada shifted to targeting the rate of inflation instead. Targeting inflation still works by changing the amount of money in our economy – which can either limit or encourage borrowing and spending - but allows more flexibility in the timing and size of the changes than the limited rules of monetarism.
In 2016, the Bank of Canada moved away from monitoring a single measure of core inflation to tracking three measures of core inflation: CPI-trim, CPI-median, and CPI-common (see the Fall 2021 issue of Economy at Work for details). The Bank explained that these measures were better able to ‘see through’ temporary or isolated fluctuations in prices and reflected more permanent or persistent movements in prices.