Prices are out of control. Inflation is running rampant. And it is all Justin Trudeau’s fault!
This seems to be the refrain Pierre Poilievre and his party are repeating over and over again.
Yes, there is no question that inflation rates are high compared to the last 30 years of relatively stable price growth meeting the Bank of Canada’s target of two percent per annum.
But along came the pandemic and the supply chain fell apart. Workers weren’t working so things were not getting made or were being made at a slower rate than previously. Manufactured goods were not being shipped because workers weren’t shipping them. Everyone was staying home. And supplies got low.
When supplies are low, those that can afford it will pay a higher price for a scarce commodity. Prices went up to match. But higher prices produce higher wage demands which, in turn, increase the cost of the production of goods. Which, of course, means that workers can’t afford the goods so they demand higher wages.
Inflation is a vicious cycle. No question about that.
How do we get out of this cycle?
The central banks of the developed world hold to the philosophical principle that the prime interest rate is their major lever. By increasing the cost of money, you increase the cost of purchasing a good due to the cost of credit. Purchasers will resist the temptation to buy and sellers will need to drop prices accordingly.
None of this has anything to do with government. Prime Minister Trudeau does not control the Bank of Canada nor the supply chains involved in getting grain to market and beef on the table, let alone the cost of lumber, a new car, or your favorite pair of jeans.
The one lever government has would be wage-and-price controls and anyone who was alive in the 1980s knows exactly how badly that went as a mechanism.
But despite blaming everything on the present government, I have yet to hear a reasonable alternative from any opposition politician. None of the parties have a workable plan for getting inflation under control except promises of tax cut.
Tax cuts sound good until you realize it means you can’t get health care because there is no money.
Todd Whitcombe is a chemistry professor at the University of Northern B.C.
