The Saturday Debate: Is there a made-in-Canada solution to high inflation?

January 1, 2022

It’s 2022 and pandemic-weary Canadians are worried about inflation.

In November, consumer prices were up 4.7 per cent compared to a year earlier, fuelled by sharp increases at the gas pumps and the grocery store and the cost of homes and cars.

Some critics blame this increase in prices on government spending during the pandemic. Their solution is to cut spending, hike interest rates, and slow down the economy.

This is a bad idea; it would reduce employment and economic activity at a critical moment in the recovery. Just as importantly, it won’t work, as it doesn’t address the underlying causes of rising prices.

To tackle inflation, governments must do two things: focus on what is causing it and support those most affected by it.

Lawmakers need to understand that inflation is being driven by three things: rampant speculation in the housing market, a volatile global oil market, and supply chain disruptions.

First, the housing market: While many Canadians are desperately searching for a home they can afford to buy and live in, others see housing as an investment only. In the first half of 2021, 25 per cent of homes sold in Ontario were bought by investors who didn’t need a place to live. In theory, building more new houses should cool down house prices, but in practice, that won’t happen when an investor can own 10 of them. If we want to curb inflation in the housing market, ending unproductive speculation — through the tax system or otherwise — is something we could do very quickly.

Second, oil prices: The leading driver of inflation in Canada today is the price of gasoline, which is tied to the world oil price. Oil prices are tied to global politics and global markets and are notoriously volatile. That’s one more reason moving to a low-carbon Canada is a good idea (see below).

Third, supply chain issues: Today’s global economy is built on low-cost oil and high technology. The former allows millions of items to be made cheaply, in places where labour and environmental protections are weak, and then shipped halfway around the world; the latter allows supply chain experts to ensure that goods are delivered “just in time” to reduce inventory costs.

The pandemic has exposed the fragility of this model. Long, tightly integrated supply chains are vulnerable to disruption. Disruptions lead to shortages. Shortages push up prices.

But the end of the pandemic, when it comes, won’t be the end of supply chain disruptions. We have entered a new era.

Photos of British Columbia after torrential rains in November are photos of the future. The rains erased roads and railways. They shut down the biggest port in Canada. They disrupted the flow of goods and people. The B.C. government brought in gasoline rationing.

This followed a summer where a drought on the Prairies pushed up the cost of livestock feed, which pushed up the price of meat in an industry where just two companies process 95 per cent of Canada’s beef in only three plants.

Fires, floods, storms, and droughts will shape our future from now on. They will disrupt supply chains and hike prices on a routine basis.

Rebuilding or moving after a disaster will become a normal feature of Canadian life. We will need to rebuild and reinforce public infrastructure more or less constantly. We will need to shorten supply lines for basic necessities. We will need to support people who didn’t need support before. And we will have to do all this while making investments to wean ourselves off the fossil fuels that are causing the crisis in the first place.

All of this will cost money, including public money. Spending less will not be an option.

Inflation and the pandemic have a lot in common: both attack household incomes, both hit low-income households hardest, and both demand government action to support incomes. Social assistance rates must rise, as they should have years ago. Minimum wages must rise. Federal transfers to low-income Canadians should increase.

Painful 20th century policy prescriptions to cut inflation by squeezing the life out of the economy, through increasing interest rates and reducing government supports, are no answer to our 21st century problems. They will only make our problems worse.

Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office. This piece was originally published in the Toronto Star.