A sharp jump in the general price level erodes the buying power of a dollar and cuts into wages.Christopher Katsarov/The Globe and Mail
Pierre Poilievre has been spoiling for a fight about inflation for the past year and a half. With the return of Parliament coinciding with the biggest surge in consumer prices in nearly two decades, the recently reappointed Conservative finance critic is getting the fracas he wanted.
“Everyone knows that this Prime Minister does not think about monetary policy. ... But when will he start thinking about the real cost burden he is putting on the shoulders of Canadians?” Mr. Poilievre asked in the first Question Period of the new Parliament last Wednesday.
Prime Minister Justin Trudeau shot back: “I am impressed to see the high esteem in which the member for Carleton seems to hold me, that I was able to create a global inflation crisis.”
The testy exchange has been repeated over the past week, with Mr. Poilievre and other Conservative MPs trying to pin rising prices on excessive government spending, while Liberal frontbenchers respond that galloping inflation is a global phenomenon.
With the annual rate of growth in the consumer price index hitting an 18-year high of 4.7 per cent in October, inflation has shot to the top of the Canadian political agenda in a way not seen since the 1980s.
The resulting debate has been noisy and muddled. Politicians, who typically leave discussions of inflation to the Bank of Canada, are suddenly opining on the causes and appropriate responses, sometimes leaning on fringe economic ideas. General concerns about affordability, notably in the housing market, are blurring with arguments about statistical measures followed by economists.
“When politicians talk about affordability and inflation, they’re usually targeting the average Canadian that doesn’t know the ins and outs of [the consumer price index], but they know what they pay at the grocery store and they know what houses are going for in their neighbourhood,” said Rebekah Young, director of fiscal and provincial economics with the Bank of Nova Scotia.
Conservatives have sensed a winning narrative, and have launched a barrage in the House of Commons and on social media aimed at tying the run-up in prices to government deficits and massive pandemic support programs. The strategy mirrors that of the Republican Party in the United States. Republican Senator Rick Scott told the Wall Street Journal earlier in November that inflation is a “gold mine for us.”
Having just won an election, the Liberals’ political fortunes are less susceptible to stubbornly high inflation than those of the U.S. Democratic Party, which faces a sustained attack ahead of midterm elections next year. Nonetheless, the politics of inflation could curtail the minority Liberal government’s room to manoeuvre on expenditures. And with the Bank of Canada forecasting inflation to average 3.4 per cent next year – even before the floods in British Columbia knocked out supply corridors and caused backlogs at the Port of Vancouver – the issue gives opposition parties a long runway.
“When you’re in opposition, you actually want bad things to happen to the government, and inflation is bad. You’d be crazy not to take advantage of it,” said Ken Boessenkool, a lecturer at McGill University’s Max Bell School of Public Policy, and a former Conservative economic adviser.
High inflation, which has been off the Canadian political radar for best part of three decades, is the ultimate pocketbook issue. A sharp jump in the general price level erodes the buying power of a dollar and cuts into wages. Central banks typically respond by raising interest rates to reduce demand in the economy, meaning that mortgage rates and other debt servicing costs are almost certainly going up over the next year.
The challenge for Conservatives, Mr. Boessenkool said, is persuading Canadians the government is responsible for the sticker shocks and product shortages throughout the economy.
Central bankers and academic economists put most of the blame on supply chain disruptions related to the pandemic, a surge in oil prices and year-over-year price comparisons known as base-year effects. The Bank of Canada’s most recent monetary policy report shows that nearly 4 percentage points of the 4.7 per cent increase in the consumer price index in October was the result of rising costs for energy and “components subject to supply constraints.” The latter includes automobiles, whose production has been curtailed by a global shortage of semi-conductor chips, and various goods manufactured in Asia that have been subject to factory shutdowns and transportation bottlenecks.
Increased demand across the economy stemming from generous pandemic-support measures and ultralow interest rates are also involved. Pent-up household savings – the Bank of Canada estimates Canadians saved an extra $8,300 on average since early 2020 – are expected to drive future inflation.
“The question is whether you can convince Canadians that this is Justin Trudeau’s fault,” Mr. Boessenkool said. “Because if they believe that it’s ports in China and railway lines going into Vancouver, no amount of shouting from the rooftops is going to do anything other than rile up the base.”
Mr. Poilievre has been hard at work trying to make his party’s argument stick. The Tory point-person on inflation and loudest critic of the Bank of Canada, Mr. Poilievre has harangued the Liberals and central bank governor Tiff Macklem on social media, in news conferences and in Parliament on the issue in recent months.
“Stop printing money, stop running massive deficits, stop paying people not to work, and get out of the way to let Canadian businesses and workers supply consumers with affordable goods,” Mr. Poilievre said in an interview last week, laying out his party’s formula for bringing down consumer prices.
The position is based on two ideas: that excessive government spending is causing runaway prices; and that the Bank of Canada’s government bond-buying program known as quantitative easing was essentially an exercise in money printing to underwrite government debt.
“The Liberals have undermined the [Bank of Canada’s] credibility by using it as an ATM to print cash and pay for overspending,” Mr. Poilievre argues.
The first point has some adherents among economists. Philip Cross, a fellow at the Macdonald-Laurier Institute and former chief economic analyst with Statistics Canada, published a paper last week arguing that “the extreme policy response to the pandemic introduced numerous distortions into the economy that are persisting, and in some cases, worsening with time.”
But the notion that federal government overspending is the principal cause of today’s high inflation can be easily overstated, said Ms. Young of Scotiabank. She said the causes of the run-up in prices are “almost entirely global, so there’s very little that Canada can do right now.” The average rate of inflation for G20 countries was 4.6 per cent in September; Euro-zone inflation hit a record high 4.9 per cent in November.
“Yes, the Liberals are running a mildly stimulative fiscal position, which theoretically supports demand, which theoretically puts pressure on inflation, which then theoretically pushes the bank to raise rates,” Ms. Young said.
“But it’s really modest,” she said. She added that higher federal government spending is also partly offsetting lower-than-expected spending from the provinces.
The second plank of Mr. Poilievre’s argument, that the quantitative easing program has compromised central-bank independence and credibility, has little support among professional economists. That said, there is debate among economists about whether the size and duration of the program, which ended in October, was justified. At its peak, the central bank was buying $5-billion worth of government bonds each week in an effort to hold down interest rates and encourage borrowing when the bank’s overnight policy rate had already been cut to 0.25 per cent, the lowest it could go.
“I think there are some holes in [Mr. Poilievre’s] direct line between ‘your prices are going up’ and ‘Trudeau is spending too much.’ I think that’s a tough link to make, partly because it’s not entirely true,” Mr. Boessenkool said.
“If you make economic arguments and they’re not true, at the elite level, you’ll be called out for it. And that will trickle down to some extent to ... the people you need to vote for you,” he added.
While Conservatives are the loudest voices on inflation, New Democrats are also using increased concern over the cost of living to push the government on issues like subsidized housing. Daniel Blaikie, the NDP’s finance critic, said more, not less government spending is needed to deal with longer-term inflationary pressures in the housing market. The average home price has jumped more than 30 per cent since the start of the pandemic.
“We need the government to spend more, we need them to build units that people can afford, and particularly we need them to build non-market housing,” Mr. Blaikie said in an interview, referring to subsidized homes.
He also expressed skepticism about the Conservative focus on inflation: “I think the Conservatives often use this as an excuse to talk about what they want to do anyway, which is to cut government spending,” Mr. Blaikie said.
So far, the Liberals have announced no new measures to respond to high inflation, and have largely sought to deflect opposition pressure.
In question period, Mr. Trudeau, Finance Minister Chrystia Freeland and other Liberal ministers have pointed to previously announced initiatives such as subsidized child care or planned investments in housing as inflation-fighting measures.
Ms. Young said these initiatives could help over the medium-term, but they are unlikely to bring down the rate of inflation in the near-term. Moreover, some of the Liberals’ housing policies aimed at putting more money in buyers’ pockets – such as expanding the first-time home-buyer incentive – could pour more fuel on the market.
Ottawa’s approach stands in contrast with that of the United States, where President Joe Biden has announced measures aimed unclogging supply chains. The White House has negotiated to keep the Port of Los Angeles operating 24/7, struck deals with several large transportation companies, including FedEx and UPS, to extend delivery hours, and released strategic reserves of oil in the hope of reducing energy prices. The U.S. government is also investigating price gouging by shipping companies.
Luba Petersen, an associate professor of economics at Simon Fraser University, said there’s likely room for directed government spending in Canada aimed at supply bottlenecks.
“If we have fiscal interventions that would help to alleviate supply chain problems, that would probably be way more effective at stabilizing inflation, than say, potentially raising interest rates. Because at least that would get products to market,” she said.
The political hubbub is happening against the backdrop of shifting central bank policy. The Bank of Canada expects to begin raising its benchmark overnight rate next year, perhaps as early as April.
Rate hikes take 18 to 24 months to have an effect, so the increases in the coming quarters will be aimed at inflation in 2023 and 2024. The bank expects inflation to be close to its target of about 2 per cent near the end of next year, then rise the year after. It does not project a sustainable return to 2 per cent until 2024.
That means the issue is unlikely to disappear from Parliament any time soon. Whether the quality of the discourse will improve remains to be seen, said Rob Gillezeau, an assistant professor of economics at the University of Victoria and a former NDP economic adviser.
“Oftentimes, when we see politicians talking about inflation, it’s not an adult conversation,” he said.
“I don’t think there’s anything wrong with it being brought up in Parliament, but we should treat citizens as being intelligent, and we shouldn’t try to overly simplify the issue.”
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Mark Rendell