The myth of "transitory" inflation

Buckle up for a rough ride

Canadian Liberal leaders and the governor of the bank of Canada dismiss the rapid rise in Canadian inflation as “transitory” and many leading economists like Rebeka Young (Bank of Nova Scotia) and Benjamin Tal (CIBC World Markets) argue that policy must be forward looking using metaphors like “where the puck is going” rather than "where it has been” in soft-pedaling the outlook. All point to the massive spending by the Liberal government in response to the pandemic as a contributing factor but argue it was “necessary” to avoid an even worse outcome.

The economic damage of the pandemic was not caused by the COVID 19 virus but by knee-jerk “lockdowns” mandated by governments in the specious belief they were necessary to prevent the spread of the virus. There is virtually no evidence that “lockdowns” had any material effect on the spread of COVID anywhere on Earth. Many studies have examined the effectiveness of the lockdowns and concluded they were of little value in controlling COVID but were a major cause of economic harm. Rather than “necessary to avoid an even worse outcome” Trudeau’s policies were the cause of the adverse outcome and the massive spending was pouring gasoline on a fire to douse it.

Politicians and public health officials have in common the belief that when faced with a problem they must immediately intervene even if they lack sufficient data or scientific knowledge to guide those actions. The result with COVID is much like the result with climate: nonsensical actions that have no ability to alter the outcome of the perceived crisis but plenty of ability to damage society. Trudeau conflates what works with what sounds good.

Their actions remind me of a famous comment by Texas Guinan - “a politician is a person who would lay down your life for his country”.

Trudeau’s actions were a “double whammy”. He supported lockdowns that caused the economic crisis and then spent $350 billion of borrowed money because “he had our backs”. The only “benefit” of his actions were his political gains - his ability to have daily press conferences where he encouraged voters to believe he was a capable leader and would protect Canadians. I would not turn my back on Trudeau under any circumstances.

Let’s take a look at the most recent inflation data underlying the 4.7% inflation rate reported by Statistics Canada. While “all items” inflation was 4.7%, key items like gasoline, energy, transportation, goods and shelter had suffered much higher inflation rates with those driven by the cost of fossil fuels up double digits. Most Canadians need to drive their cars and heat their homes, and virtually everything they need is exposed to the costs of transportation. Luckily, food costs only rose 3.85%. I say “only” tongue in cheek because 3.85% annual food inflation deprives the poorest Canadians from healthy diets and in concert with 25.5% energy inflation makes many choose between heating their homes and having enough to eat.

Canada is a country with 165 billion barrels of oil and vast resources of natural gas. Why on Earth would Canadians be exposed to high inflation in energy costs?

The answer is plain as day - Trudeau’s attack on the energy industry driven by a cult like devotion to the specious “climate crisis” has limited available supplies at a time when demand for fossil fuels continues to grow. Trudeau is not alone in this silliness, with Biden’s destructive policies in America matched by similar nonsense from European leaders like Boris Johnson, Angela Merkel, and Emmanuel Macron all contributing to an global energy crisis that has seen European energy costs skyrocket just as winter begins. The Canadian “carbon tax” cannot be ignored as a factor in Canadian inflation, one which will accelerate under Trudeau with programmed increases planned for each year for years to come.

The dream that this surge in inflation is “transitory” is just a dream. The global energy crisis is more likely to deepen that ease as world governments outside of Russia and China commit to “fighting climate change” based on a prevalent view that taxes can alter nature. As for the Russians and Chinese, they are giggling watching their global adversaries self-immolate with their stupidity.

Public servants in Canada and those receiving public pensions enjoy automatic increases in their wages and pensions to adjust for inflation, so labour costs in the public sector will increase regardless of central bank policies. Private sector labor organizations who do not yet have inflation indexing will put that on their list of demands. Widespread labour shortages in Canada will see bargaining power shift to workers. All those factors will add to inflationary pressures.

Government spending shows no signs of abatement. The most recent budget from Trudeau’s government calls for over $100 billion of new spending and a projected deficit of $155 billion. Deficits contribute to inflation. Trudeau will crow that is a reduction from the enormous deficit of 2020-2021 but ignore the fact that a deficit of $20 billion when he was elected was deemed too high and he claimed would resolve itself. That claim didn’t age well.

Absent sensible fiscal policy, Canada is left with monetary policy as its defense to runaway inflation. That weapon is a double edged sword - if rates rise too high too quickly they stifle economic growth and if they don’t rise enough inflation continues to rise. As I pointed out in an earlier article, higher rates can trigger a housing market collapse.

Caught between a rock and a hard place, Canada’s central bank and Ministry of Finance have little room to manoeuver and will make only token changes in policy, overstating the expected benefits from each pronouncement. Minister Crystia Freeland will lead a parade of higher taxes which themselves are inflationary and try to put lipstick on a pig in the next federal budget. Stagflation is the likely outcome, so buckle up and for those not old enough to remember the late 1970’s, read up on Canada’s last trip to double digit interest rates, wage and price controls, and economic despair. Those who do not learn from history are doomed to repeat it.