Three ways to cool inflation
Inflation is a shape-shifter: what makes it move, and how fast it moves, changes over time.
The pandemic has seen inflation in many different shapes. From the original price spikes due to extraordinary growth in discretionary demand for items like lumber for renovations in the summer of 2020, to more broad price inflation for a range of goods in short-supply because of production and shipping disruptions. And now, since Russia invaded Ukraine, the price spike has evolved to include basic items like food, shelter and gas. The continuing escalation of price increases, at last count 7.7% - a rate not seen since January 1983 – is coupled with average wage growth trails at half the pace (3.9%).
What was once viewed as a transitory phenomenon, that would dissipate as the pandemic ebbed, is now a troubling and stubborn problem. It’s causing a serious erosion of purchasing power for everyone, translating to greater food insecurity and risks of homelessness for the lowest income Canadians.
But the very drivers of the problem, particularly for the three basics – housing, gas, food – flag the elements of the playbook that cool sizzling prices over the coming hot summer months. They group into three categories: demand-related; supply-related; and related to “greed-flation”.
Demand: central banks are cooling demand very effectively by aggressive rate hikes, in Canada, the US and Europe. Higher interest rates have softened the escalation of housing prices, at long last; and already analysts are expecting a price correction in this item that takes the biggest bite out of household budgets, both high- and low-income.
Supply: Oil markets will see fresh supply from OPEC+ partners in the coming weeks, relieving some price pressure on gas at the pumps, though some of the price pressure comes from more people deciding that the pandemic needs to be over and it’s time to vacation and travel more to work and play in person.
Greed-flation: Corporate concentration means some players are in a position to set prices, commensurate to passing through higher costs and sometimes at a pace that exceeds increases in input costs.
Food costs are mostly impervious to policy actions, in the short term, and the supply shock effect (originally due to fewer migrant workers to plant and harvest crops) may be accelerated by lack of supply due to Russia’s invasion of Ukraine (the region is responsible for a third of global exports of fertilizer and a quarter of cereals like barley and wheat). Since crops weren’t planted because of the war, the full impact will not be felt for months, after the harvest that will not come would have normally taken place. In short, we ain’t seen nothing yet with respect to escalating food insecurity in Canada. Consequently, there are at least three major measures that can be taken through policy directives to ease the inflationary pinch, particularly for those most vulnerable to it:
Stop trying to claw back CERB from those who have no savings to pay people back, and are likely to be the most food insecure Canadians to begin with. In fact, perhaps it would be smart to increase until the end of 2022 the refundable GST credit, which might help our most inflation-challenged neighbours at least feed themselves in the coming difficult months. (Gentle reminder: a broad tax cut is inflationary!)
A person’s best inflation hedge is a good job. Ask anyone making $60,000 a year or more and then ask someone making $30,000 a year or less. Average wage growth is currently at half the pace of price inflation, and you know that average wage growth is usually driven by those at the top. So why make things worse? In April, the federal government opened the floodgates on temporary foreign workers, to respond to businesses struggling to deal with labour shortages. Time to concurrently open the floodgates for people who wish to make the transition from temporary to permanent resident status in Canada (if they’re good enough to work here, why aren’t they good enough to stay here?). If the feds don’t move in that direction, and quickly, they have – by policy design – introduced a new wage suppression measure at a time when real wages are already losing ground at a pace not seen for four decades.
Is there price fixing rather than “efficient” price signals from the market? Are some companies more able to pass through price increases to consumers and protect or even increase their profit margins? Of course, particularly in sectors of the economy marked by high degrees of corporate concentration, i.e. few players. In Canada these sectors include: telecommunications, retail food, fertilizer, meatpacking, ores, steel, banking, retail gasoline....and others I’m forgetting. Until the pandemic hit, the pace of mergers and acquisitions were at elevated levels for over a decade, accelerated because of historically low borrowing costs after the Global Financial Crisis in 2008-9. Our markets are already quite dominated by big players. We have a Competition Bureau that monitors the possible creation of market inefficiencies and price effects when mergers and acquisitions are proposed, but no consumer protection agency for what happens if the deal passes the sniff test. We had more vigorous consumer protection established by the federal government in the 1960s. The time has come to bring back a body that can dig into how prices are set (remember price collusion of bread by the grocery stores?) and take action if price-setting is revealed.
The torrent of recent news has been so consistently bad it’s easy to feel we can do nothing; but, in fact, there are plenty of clues as to what we can do, and what we should stop doing (first do no harm!).
As summer temperatures, tempers and prices sizzle, we have more levers to cool things down than we think. Pitter patter, let’s get at ‘er.
Find me on Twitter @ArmineYalnizyan, and on Instagram @futureofworkers.
The Atkinson Fellow on the Future of Workers is supported by the Atkinson Foundation. Find more information here.