Inflation: A poorly understood economic construct

One manipulated and abused by political leaders but rarely dealt with in any meaningful way

Most North American citizens have a decent understanding of inflation as it effects their own family budgets. They know what they pay for food, rent, gasoline, utilities, etc. and they can see for themselves how prices are rising and how their own income is changing. About two thirds of household spending comprises shelter, transportation and food.

You wouldn’t think this was complicated.

But political leaders don’t like reality when it doesn’t suit their ideology. So they create “inflation indicators” and “inflation statistics” that are largely meaningless to anyone but form the basis for government policies. Reported inflation numbers are unreliable and to many are meaningless and leaders divide the reports between “core inflation” and “headline inflation” with “core” leaving out food and energy as if they didn’t matter when together with shelter they comprise the major costs of living. Even that subterfuge is running into problems as “red hot core inflation” spells trouble for the Fed (and the Bank of Canada for that matter).

In this article, I will point to actual inflation rather than give any ink to the “reported inflation” beyond what is needed for comparison.

Take some simple staples. Milk for example, a staple in most healthy diets. Milk prices are up 12.68% year over year in United States. Every shopper knows what milk costs.

Most homes are heated and many are cooled by natural gas in Canada and the United States. Natural gas prices have risen 135% year over year in Canada and the average natural gas price in 2022 is up 94%. The U.S. price for natural gas is roughly double the Canadian price. Are you getting this?

Most North Americans drive a car. Statistics Canada reports that the price of one litre of unleaded gas has risen from $1.38 in July 2021 to $1.88 in July 2022, a rise of 36%.

The official inflation data reported by Statistics Canada and the Bank of Canada show rising inflation for certain, but the indicated inflation rate is low in relation to milk, natural gas or gasoline at about 8% in Canada and 10% in United States. For that to be true, something widely used must be declining in price. I can’t find any evidence that exists. Can you?

Well, it is not rent which is up 20% year over yea in the GTA.

It is not coffee which is up almost 13% year over year.

Even tomatoes are up 17.7% year over year.

When you hear political leaders claim “inflation is transitory” or that inflation is caused by the Ukraine war or that Trudeau’s profligate spending and toxic energy policies didn’t create inflation you know they are lying to you. Left wing rag Toronto Star publishes opinion pieces that blatantly mislead readers by claiming that Trudeau’s policies are not to blame and there is little Trudeau can do about inflation, a safe story for the Liberals. The inflation we are enduring can be traced to two factors in Canada - massive spending by the Trudeau Liberals which doubled Canada’s national debt and a global energy shortage created by left-wing policies that drove money out of the fossil fuel industry pretending there were low cost alternatives to replace that energy, when it is patent that there are not.

Energy prices are now excruciatingly high and are not going to fall any time soon barring a major recession, and such a disastrous recession is now the mainstream policy of the political parties who created the inflationary environment - Trudeau in Canada, Biden in United States, Macron in France and a plethora of others throughout Europe. Central banks are now raising interest rates, but at a rate where it is still less costly to borrow than the rate of inflation and borrowers benefit from repaying their loans with lower valued currency when the loans come due. The higher rates are crushing the housing market and will eventually damage small businesses and bring down the economy, despite the smarmy speeches that suggest a “soft landing” is likely.

The likely recession will lower prices for a time, only to see them rebound to even higher levels unless there is a sustained and dramatic increase in global energy supplies and the only source capable of creating such an increase in a few short years is the fossil fuel industry. Higher oil & gas production is anathema to left-wing leaders so they will double down on their rhetoric and millions will lose their homes and their livelihoods, and in some cases where a cold winter will collide with the inabilty to afford heat, their lives.

This is not a pretty picture and ends badly for most people with energy investors the only ones likely to benefit.