The fallout from the COVID-19 pandemic will make tracking and understanding inflation a challenge in 2021. But we can’t let employers and governments use these ups and downs to block long overdue and much needed public sector wage increases.
The Bank of Canada and the federal Department of Finance monitor inflation closely. The Bank thinks a healthy economy should have low and stable inflation. The Bank has set a target for inflation of between 1.0 and 3.0 per cent. If inflation gets too low, it’s a signal the economy needs a boost – and the Bank uses its tools to increase the amount of money in the economy. If inflation gets too high, the Bank pulls back the supply of money in the economy by reducing its purchases of bonds or increasing interest rates.
The Department of Finance is interested in inflation because it doesn’t want to be pushing out stimulus spending while the Bank is trying to put the brakes on growth. This debate is not just technical, it’s politically charged, with pro-austerity forces looking for any excuse to cut back on government spending and keep workers’ wages low.
Unfortunately, the COVID-19 pandemic means it is going to be quite challenging to track price changes and interpret their meaning this year. Most of the inflation figures mentioned in the news are year-over-year comparisons, and the last year has seen dramatic fluctuations in prices. The Consumer Price Index (CPI) is the most widely used measure of inflation in Canada, but it is not a perfect measure, and many people will face quite different changes in their cost of living. In April 2020, the CPI fell by 0.2 per cent, the first reduction in over a decade. CPI stayed below its pre-pandemic level until October 2020. This means the overall inflation numbers for April through October 2021 are going to be deceptively large, because they’re being compared to a temporarily low price level. This is what we call ‘the base effect.’
The April 2021 data shows that the overall price level rose by 3.4 per cent compared to April 2020, but only 0.5 per cent compared to March 2021. Prices are definitely going up, just not as fast as the number in news headlines makes it appear. We should expect the base effect to be smaller in the next few months, but headline inflation numbers will still need to be interpreted with caution until the end of the year.
Dramatic increases in the price of some commodities, such as lumber, have made the public debate even more muddled. Commodities aren’t captured in CPI since they are not final consumer goods. But if the prices of inputs like steel, wood, and semi-conductors stay high, we will eventually see price increases in final consumer products, and that will feed into higher inflation in the longer term.
What does this mean for workers? Expect the usual suspects to be pointing at the high price of a 2x4 at your local lumber yard as an excuse to reduce public sector borrowing and warn about the dangers of wage increases tipping us into an era of runaway inflation.
The truth is that while prices are increasing, inflation is nowhere near out of control, and workers’ wages have fallen behind for too long. Increasing workers’ wages is one of the most sustainable and healthy ways to support an economy, since we generally spend those extra dollars in a local business.