Inflation explained: From your pocket to Parliament Hill

Jordan You probably didn’t need your favourite daily news podcast to tell you this, but stuff costs more these days days. A lot of stuff, costs a lot more.

Inflation News Clip …the price of everything from groceries to gasoline to housing is going up, and the inflation rate is now the highest it’s been in nearly two decades…

Jordan And it doesn’t look to be stopping anytime soon. Today we’ll tackle the basics behind inflation. What causes it, how we can handle it, what it will do to your bank account beyond stuff costing more, and beyond the basics, the tougher stuff. What’s to blame for the current state of inflation? Who’s to blame, if anyone? Is there any way to turn this ship around? And should it be, as it is already becoming, a political weapon.

Pierre Poilievre Clip …but the Prime Minister says he doesn’t think much about monetary policy. Clearly, that’s no surprise. After all, it’s Justin-flation…

Jordan Does the party in power have any control at all over the inflation rate? And does it really matter if they do or not? As long as it makes for an effective line of attack heading into 2022?

I’m Jordan Heath-Rawlings, this is The Big Story. Max Fawcett is a political writer and commentator in many places, including where he tackled inflation at the National Observer. Hi, Max.

Max Good morning, Jordan.

Jordan We’ll get to the political aspect of inflation later because I know that’s something you like focusing on. But first, simply, what is inflation as it pertains to what we’re seeing in Canada today?

Max So inflation very simply is when prices go up. We’ve seen this over the course of our own lives. You think back to what a pack of gum used to cost or a bottle of milk and heaven forbid, a house in Vancouver or Toronto. So inflation is a fairly normal phenomenon. And we have a central bank, like most countries in the world, that is charged with ensuring that inflation doesn’t run too far out of control. So historically that’s been trying to keep it at 2% give or take. And that’s what’s called their mandate. And they do fancy monetary policy things to keep inflation under control. And for most of our lives, I turned 42 today, it’s been a non issue.

Jordan Happy birthday!

Max Thank you. I love nothing more than talking about inflation, so this is a nice early gift. So it really hasn’t been an issue in our lives. It certainly was in the 70s. It has been in the past, in other countries. But it’s sort of been, in a way, in the backdrop of our normal day to day existence, and it has started to percolate over the last twelve months. You’ve seen people talk about it more, things are costing more. Inflation is going up, and it’s, I guess, moving into the forefront.

Jordan When you speak about it being traditionally trying to keep it around 2%. How bad has it been in Canada over the past year, and maybe as an extension of that, how does that rate in Canada compare with the rate around the world?

Max Sure. So it has run ‘above target’ as a central banker would say. We’ve seen monthly year over year readings upwards of 6%, 5%, which is pretty eye catching when you think about where it’s been historically. Now, a big part of that is that it’s a year over year figure and 2020 was one of the weirdest years we’ve ever had—hopefully we’ll ever have—in our lives. And so all of that year over year data is noisy. And this is why economists, central bankers, have been very careful about this to say, yes, we see that on a year over year basis, prices are going higher, but we’re not sure that this is actually inflation in the sense that we saw it in the 70s, where it just kept on going and going. This might be just COVID-19 weirdness and the impact that it’s had on supply chains on economies around the world. And you look at the global data and it really does speak to that.

This is not a Canada phenomenon. This is not Canada has inflation or the United States has inflation. This is everyone has inflation. There’s a good piece in Axios that showed the change in inflation by country 2019 to 2021. 2019 is obviously a much better data point to use because it’s pre-COVID, and we’re nowhere near the top. Brazil, 6.5%. Turkey 5.7%. The United States 3.6%. We’re not in the top five, and it’s because COVID and the way governments responded to it around the world, it was a global phenomenon befitting a global pandemic. So I think anytime you hear someone talking about this and trying to attribute causes to it specifically in the Canadian context and suggesting it’s something that someone here has done, you have to raise your eyebrows a little bit.

Jordan In general, aside from the pandemic, and I guess perhaps we simply won’t be able to answer this question until it’s over, but do we know what else could be causing it? The pandemics messed with supply chains, but so has the climate crisis. And I’m wondering what other factors might be at play here, like the whole world kind of seems not in a great state these days.

Max Yeah, that’s a big one, the climate piece of this. And it’s one that I think we overlook at our peril. So there’s been a lot of talk about the rising cost of food, and I know we don’t want to get into the politics yet, but the Conservative Party has done a bunch of memes about the rising cost of breakfast. And look, beef, bacon, things like that, they have gone up 25% for beef, 20% for bacon over the last twelve months. But a big part of that is the fact that we have extreme weather events that make it hard to do agriculture. We’re seeing that in BC right now, where a huge portion of the poultry stock got unfortunately wiped out by the flooding there. And so guess what? Egg prices are going to go up. Chicken prices are going to go up. That is what happens when you have extreme weather events. With beef, we had major droughts this summer in Alberta and Saskatchewan. Again, that has an impact on prices.

A big part of this is energy, and there’s a sort of interesting duality here. So gasoline prices, as everyone who’s tried to fill their car up recently knows, they’ve gone way up. Natural gas prices have gone way up. This is because of COVID-19. It’s because the price of oil actually went negative for a brief time. And producers around the world basically cut back their investment in new supplies. And OPEC, the cartel that manages global oil prices has been very successful at managing them higher. That’s not anything that the government has done in Canada or the United States. That is the market. And that is a cartel. And it’s ironic, the same people who are very noisy about inflation and the cost of living are also the ones that are the biggest boosters of the oil and gas industry in Alberta. And guess what? Rising oil prices is good for the oil industry here in Alberta. It’s been great for Alberta. We’ve turned one of the biggest deficits in provincial history into almost a surplus, it seems like, over the next twelve to 24 months.

So there’s a lot of contradictions floating around here. And it would be better if we listen to economists and experts rather than people who perhaps have a vested interest in presenting this story in a particular way, because, like a lot of things right now, it’s a lot more complicated than some would have us believe.

Jordan In terms of that then, what do the experts say about what inflation does once it picks up? And I guess my very basic question is, could we be talking in six months about a trend that has completely reversed itself? Will we see deflation? Do we know what those trend lines look like?

Max We don’t. Everyone is guessing, informed speculation, and some more informed than others. But this really is something we’ve never experienced before. And so all we can do is use our best judgment. Most of the economists that I follow, that I trust, that I listen to, I don’t want to promote another podcast here, but the Herle Burly had a very good interview with Frances Donald, who is a chief economist for Manulife Canada. And she’s very dialled in on inflation, very well spoken, very smart. And I don’t want to speak for her, but her take was basically that this is not the government’s doing. This is transitory. This is temporary. This, too, shall probably pass. And the worst thing that we could do right now is raise interest rates to deal with this inflation, which is sort of the prescription that a lot of let’s call them conservative pundits and thinkers have. They think that this is the same inflation that we saw in the 70s and because we killed that with interest rate hikes, we should kill this one with interest rate hikes. And her analysis suggests that that would be possibly the worst thing to do. So everyone should sort of give that a listen.

We don’t really know what’s going to happen over the next 12 to 24 months, but I think a good reminder or a good sort of measuring stick is a video that Pierre Poilievre, the Conservative finance critic, did back in March, where he did a YouTube video with a piece of lumber, and he talked about how the price of lumber had gone up so much. This was all the government’s doing, and they were making life harder for Canadians. Well, guess what happened to the price of lumber over the next six months after he made that video? It went down 50% because the supply chain bottlenecks around the lumber industry got unbottlenecked and they found ways to get more lumber onto the market. I suspect we’re going to see the same thing happen for a lot of the products that are currently bottlenecked, whether it’s microchips in Southeast Asia, whether it’s vehicles.

One of the weirdest phenomenon over the last twelve months is that used cars are now 26% more valuable than they were a year ago. If you’re on a lease and the company is offering to buy back your car at the price you previously agreed upon, I would say don’t do it because your car is probably worth more than it was when you paid for it or when you bought it. So there’s a lot of weird phenomenon happening in the global economy through global supply chains. I think those will mostly work their way out over the next twelve months.

The real question that economists need to keep their eyes on, is labor going to be able to command a higher price for its services? Because that’s sort of the stickier part of inflation. If workers can bid their wages up, if they can get paid more, that has a sort of momentum that can be self sustaining. And that’s not a bad thing. That, I would argue, is one of the better parts of inflation. We talk about inflation almost entirely in negative terms, and it’s not always in negative terms. If workers can make more money, if they can get paid more for their services. Net, I think that’s a very good thing. Maybe it’s not good if you’re running a large multinational corporation, but most of us aren’t doing that. The inflation conversation, I think, needs to be kind of pulled apart and looked at in its various components.

Jordan What impacts does inflation like this have on the economy as a whole, beyond the average Canadians pocketbook? And we’re going to talk about the average Canadians pocketbook because obviously people have a very emotional reaction to that because it impacts their life on a day to day basis. But when we talk about the overall health of a country’s economy, does inflation only pull one way? Or, as you say, are there impacts other than simply, ‘stuff costs more’?

Max It really depends on what your economy looks like and where the inflation is coming from. So from Canada’s perspective, if inflation is being driven by rising oil and natural gas prices globally, that’s good for us. Oil and gas prices can make our economy go. You look at the experience after the last recession in 2008/2009, we outperformed most economies around the world because oil prices were strong. So if inflation is coming from OPEC managing the market, from companies not investing in oil and gas because they’re worried about climate policy, they’re worried about long term demand. That will probably be good for us, net net. Less so for Ontario and Quebec, more so for the Prairies.

If inflation encourages companies to invest more in the near term, that’s not necessarily a bad thing. It depends on the shape of that investment. But if it gets out of control, it is not good, broadly speaking, for economies. And that’s why if this persists beyond, let’s say, twelve months from today, you will see the bank of Canada do more. Once they’re convinced that it’s not just supply chain bottlenecks. Once they know that, or if they know that it is sort of a more durable phenomenon, then they’ll take action. But them taking preemptive action and doing it in a way by raising interest rates, which reduces investment in business, which cuts the ability of people to make a living, earn wages, all that kind of stuff, that would be bad. That would be probably a dumb thing to do. And I don’t think they’re going to do it.

Jordan That was going to be my next question anyway. So just simply, it’s going to take another twelve months before we can figure out whether or not this is a blip or a real trend? Because look, just putting myself in the average Canadian’s shoes, that’s a long time to wait with things rising 5%, 10%, staples of daily lives.

Max It is. And I think the best course of action here is do no harm. It’s sort of the central banker’s equivalent of the Hippocratic oath. And if they come in and raise interest rates and it turns out that interest rates weren’t really the issue, and we go back into recession and businesses pull back and people start getting laid off again. But inflation is still there because it wasn’t actually a demand issue, it was a supply issue. Well, now we’re in Stagflation, which really is the 1970’s. That’s the worst of both worlds where you get, as the name suggests, you get a stagnant economy, you get recession, but you also get inflation. That’s very bad. That is the thing that we want to avoid at all costs. So I think central banks will err on the side of letting this play out a little longer, just so they’re absolutely sure they know what is causing it and what isn’t causing it.

And that was one of the points that Frances Donald made in that podcast was that central banks can’t afford to make a mistake here that would hurt the economy because the economy isn’t that strong right now. For all the GDP growth we’ve seen over the last little while, a lot of that has been because of government stimulus, and as that gets pulled back, if it turns out the underlying economy isn’t really that strong, we don’t want to have to go back into doing government stimulus programs because we did rack up quite a bit of debt over the last year doing that in the first place. So I think they’ll err on the side of caution. I think that’s the right move for them. And as frustrating as it is for Canadians to have to deal with this, an additional 5% inflation in the price of bacon, it’s manageable. Especially if their wages are increasing at the same time. It’s not ideal, but it’s certainly a lot better than deflation, which is the big evil that we really need to be sort of scared about.

Jordan Explain how that would happen quickly if you could.

Max Well, deflation is when prices drop and that sounds great if…

Jordan If it’s bacon.

Max If it’s bacon, you eat a lot of bacon. That sounds great. But that also has its own momentum, and it affects wages. It affects investment. And that’s where the really ugly sort of global crises happened. That was what happened in Greece in the early last decade. That’s what happened during the Great Depression. If you believe that the price of something six months from now will be lower than it is today, you won’t spend. And the economy, as a result tends to go into free fall. So central bankers are understandably far more nervous and afraid of deflation than they are of inflation. And so I think that’s what they’re going to manage around.

Jordan You mentioned earlier in this conversation, the Conservative Party’s memes, whatever you think of them, that pointed out how much various components of a nice breakfast had gone up over the past year. But to my mind, whatever you think of the Conservative Party, this is a really emotional issue for a lot of Canadians. It’s one of those things that hits you where it hurts quite often, especially at the pumps or at the supermarket. And if you’re a party that’s just lost an election that is trying to make a play as the party of fiscal responsibility heading into the next election… Think whatever you want of the CPC here because I’m not landing on one side or the other, but it seems like the appropriate way to message on this file.

Max Absolutely. I think that the Liberals, the government, any government that is dealing with inflation is vulnerable because like you say, it’s a very emotional issue for people. The idea that they have to pay more for things, that their basic cost of living is going up, is scary, and the pace of wage growth is measured in much longer duration. So you may get a raise at work, you may be able to negotiate a higher salary, but that doesn’t really show up in the same way that going to the grocery store and seeing that eggs are suddenly a dollar more expensive does for you. So there’s a very big vulnerability here. I agree.

The problem, I think, is in how they’re messaging. Look, I start from a very naive belief that politicians shouldn’t lie to people, but you really shouldn’t lie to people when that lie can be proven wrong. And that’s where the error is here. Pierre Poilievre for the last few months has been making videos, on Twitter, in the house giving speeches, blaming the Liberals for inflation because they printed money and because they ran deficits to pay for COVID supports. Now two problems here. Number one, those COVID supports were super popular. They bailed out households, they bailed out businesses. Without it, I don’t want to think about where we would be right now as a country and as an economy. So number one, that’s just dumb. You don’t campaign against things that are popular.

Number two, you don’t attribute something that is obviously false. We’ve had conservative columnist John Ivison come out and basically tell Pierre Poilievre that he’s wrong. We’ve had pundits like Ken Boessenkool say, no, this is not actually where inflation is coming from, it’s coming from all the things that I said, it’s coming from supply chains COVID. And he didn’t have to do this. All he had to do is come out and say inflation is a problem and the Liberals aren’t doing enough to stop it. And then that would hit home. That would work. That would be an effective attack, because maybe the Liberals aren’t doing enough. Maybe they aren’t helping Canadians enough, whether it’s through making things more affordable, whether it’s through targeted relief. There are ways to tie people’s vulnerability to a lack of action by the government.

But because, and I think this is the gift that Justin Trudeau has, he makes his opponents dumber than they are. I don’t know why. Maybe it’s because he has a good head of hair. Maybe it’s because of his family linkages, whatever. He makes people behave in ways they shouldn’t. And with the Conservatives and Poilievre, he’s doing it again. He’s making them try to tie inflation to his policies, which is just a giant own goal. So if I was advising the Conservatives right now, I would say, knock it off, forget about talking about deficits and money printing and just talk about the fact that the government isn’t doing enough to help Canadians. And that might work because there’s nothing really that the bank of Canada or the Liberals can do over the next twelve months to wrap this up and bring it to heel. It’s going to have to happen naturally, and that gives them twelve months to bang away at the government for rising cost of living. But instead they’re going to keep putting the ball in their own net.

Jordan In terms of the Liberals, there’s no quick fix, and you just have to wait and see. But in the meantime, it’s a really tough thing to message and say, yes, we know eggs cost more gas costs more, and hopefully that’ll start going down again twelve months from now. Is there something that they can do beyond interest rates without screwing up the economy that they could put in place quickly, whether that’s a subsidy or a program or something to say, hey, we see what’s going on here, we see that it’s tough, and we’re trying to help?

Max Yeah, so it’s interesting. I just talked about Justin Trudeau having a reality distortion field with Conservatives. Pierre Poilievre has a smaller one, but he has one that the Liberals fall prey to, where it is so tempting to dunk on him and talk about how stupid and wrong he is. And I’ve seen the finance Minister do this in the house where she kind of mocks him. She points out, you can’t tell the difference between monetary policy and fiscal policy, what a maroon. Canadians don’t care about that. And the more time they spend dunking on Poilievre, the more they risk being seen as out of touch on this issue. And so I think they really need to focus. And they have a budget coming up in the new year, at some point, they need to include measures that directly confront this issue.

They can tie it to climate change. I think that’s probably a smart move for them, branding wise. The cost of food is rising because of climate change, here is a rebate or here’s an addition to your climate rebate that you’re getting that directly addresses that issue. There are ways to do this that kind of tie into their overall messaging and still address the issue. And then they kind of put the inflation conversation where they want to have it, which is in the climate change box and not in the cost of living box. So they can do things here. But they can’t get complacent and they can’t sort of indulge themselves in dunking on the conservative finance critic because as dumb and wrong as he is, that isn’t what matters to most Canadians.

Jordan It sounds like the final message here is maybe from the NDP to say, like, both of you, stop acting like babies and help the Canadian people.

Max Absolutely. Yeah. A pox on both your houses. Stop behaving like children and focus on what really matters here. That would be an easy message for the NDP to sell. I would also like to see the NDP propose solutions. I think that is their role, whether they embrace it or not, in our democracy. And certainly as the third place party, or the party that is working with the government right now, they can do that really effectively. I think the current NDP leader has a habit of indulging a little too much in attacks on the government rather than proposing solutions. But this is a golden opportunity for Jagmeet Singh and the NDP to come out and say, you two are behaving like children. Here’s what we need to do, now please go get it done.

Jordan Max. Thanks for this, as always. Happy Birthday and we’ll talk to you soon.

Max Thanks for having me on.

Jordan Max Fawcett writing in The National Observer and speaking, obviously, right here on The Big Story.

You can find more at thebigstorypodcast.ca. You can talk to us anytime on Twitter at @TheBigStoryFPN. You can write to us via email, thebigstorypodcast@rci.rogers.com [click here!].

And you can find this podcast and whatever podcast player you prefer. You can like it and rate it and review it and subscribe to it and follow it and add it to your playlists and do whatever you need to do to make sure you listen to us every day. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.

Back to top of page