Inflation in Canada continues to surge despite the Bank of Canada’s efforts to tamp down on price growth, with some economists and the central bank’s own governor expecting an even higher reading in the June report due Wednesday.
Inflation, which hit an annual rate of 7.7 per cent in May, has topped the Bank of Canada’s estimates through the first half of 2022.
Tiff Macklem, who holds the top post at the central bank, told a group of business owners last week that inflation will likely top 8.0 per cent in due course. The Bank of Montreal (BMO) said in its updated inflation forecast earlier this week that it now expects inflation will average 8.3 per cent across the third quarter of the year.
5:26 What the latest interest rate hike means for your family’s bottom line
What the latest interest rate hike means for your family’s bottom line
The higher the temperature rises on Canada’s inflation thermometer, the more Canadians of a certain age flash back to the 1970s and 80s, when annual inflation hit 12.5 per cent in 1981.
Back then, the Bank of Canada was forced to raise its benchmark interest rate to 21 per cent to get prices back under control, triggering the deepest economic contraction since the Great Depression.
Experts tell Global News there are some striking similarities between today’s inflation episode and the price pressures of 40 years ago — as well as a few key differentiators that could mean the difference between hitting a recession or achieving the “soft landing” the central bank is after.
Striking similarities
James Orlando, senior economist with TD Bank, first started tracking the similarities between today’s inflation period and the highs of the previous generation back in April.
Then, he noted that the causes of inflation today — surging food, fuel and shelter prices — were the same ones driving Canadian prices higher over two distinct periods, one in the early 1970s and one later in the decade, stretching into the 1980s.
“Current inflation is very much just like what happened back then,” he tells Global News.
Inflation surged in the 1970s and 80s, with many economists drawing similarities to today’s price pressures.
Global News
The annual rate of inflation has steadily been rising throughout 2022.
Global News
For instance, many economists point to Russia’s invasion of Ukraine and the spillover effects on oil and food supplies as a primary source of global inflation today.
In the 70s, the Yom Kippur war, followed a few years later by the Iranian Revolution and the Iran-Iraq War, also put immense pressure on the prices of oil.
Meat prices, meanwhile, skyrocketed 70 per cent in 1978, according to Orlando’s analysis, leading to higher costs in the deli aisle that would feel familiar to many Canadian households looking at their grocery bills today.
2:03 Inflation: Why the price of groceries are expected to rise
Inflation: Why the price of groceries are expected to rise
Orlando wrote back in April that while today’s price hikes might not be at the same magnitude as the 70s and 80s, it might feel just as significant. When inflation hits the staples we buy regularly in the grocery store, it elicits a more intense, emotional reaction from consumers, he explained.
But while prices were high, Canadians also were spending heavily through much of the 70s thanks to rapidly rising wages and low interest rates.
Ian Lee, associate professor in the Sprott School of Business, remembers working through that inflationary period at BMO, handling mortgages for the bank in 1980.
He says in the 70s, it made sense to borrow rather than invest and buy later, because interest rates were low and tomorrow’s prices were expected to outpace any returns on savings and investments.
“Saving didn’t make any sense at all. So it created a real spend, spend, spend, borrow, borrow, borrow culture,” he tells Global News.
Lee said that many Canadians — himself included — put their money into homes. A run-up on housing prices as Canadians rushed into the market only fuelled inflation further.
Shelter has been a primary driver for today’s inflation episode as well, with rents now surging at the same time as rising interest rates make mortgages more expensive to carry.
Key differences
Lee says one of the most important differences between today’s inflation and that of the 70s is the tightness of the labour market.
The 1970s and 80s saw stagflation materialize — slowing economic growth and high unemployment with prices surging nonetheless.
Today’s unemployment rate sits at a record low of 4.9 per cent, on the other hand.
Macklem has pointed to the strong labour force readings as proof that the economy can take higher rate hikes, even as some economists warn layoffs will follow suit if the bank is too aggressive.
4:08 Too much, too soon? Experts say rapid interest rates are pushing Canada closer to a recession
Too much, too soon? Experts say rapid interest rates are pushing Canada closer to a recession – Jul 6, 2022
Indeed, when the Bank of Canada had to raise its policy rate above the 20-per-cent mark in the 80s, following the U.S. Federal Reserve into the “war on inflation,” the economic pain was intense: the unemployment rate rose to 12 per cent in 1983.
Lee says the only reason interest rates had to go so high back then was that the Bank of Canada didn’t recognize the inflation crisis before it was too late — prices crept up over the course of more than a decade, compared to the sudden jump in just a few month’s time that we’re seeing today.
Central banks around the world did not chiefly use their policy rates to tackle inflation by that point in history. Canada was among the first to adopt inflation targeting as a mandate in 1991.
Though Lee believes the Bank of Canada again waited too long to address bubbling inflation, today’s reaction is years ahead of the 1980s response.
“The longer you postpone taking the medicine, the worse the problem gets. And the tougher the medicine becomes,” he says.
Lee projects interest rates will not have to rise as high as they did 40 years ago and the Bank of Canada has reacted in time to skirt double-digit inflation figures.
Orlando says that so far, the Bank of Canada has maintained belief among Canadians and businesses that it will get inflation back to target — a critical tool in its own right to keep expectations in line and stop high inflation from becoming entrenched.
“The belief is still there. And I think the inflation target is a big contributor to that.”
Are we close to peak inflation?
In its forecast this week, BMO projected that inflation would peak in the third quarter of 2022, dropping to an average of eight per cent in the fourth quarter and following a steady decline through 2023.
Tu Nguyen, an economist with RSM Canada, tells Global News that there are signs inflation could peak this summer, but what determines that is largely outside the Bank of Canada’s purview.
Oil prices have shown signs of decline over the past month from their peaks this past spring, and the aggressive action taken by central banks around the world should dampen consumer demand and give supply chains time to catch up.
But while global pressures have shown signs of easing, they can just as easily persist or even reverse course through the fall, Nguyen warned.
“There is still a war going on,” she said. “There’s a lot of instability, geopolitical tensions and a pandemic raging. And who knows what’s going to happen on the global stage over the next six months.”
OTTAWA – The New Democrats confirmed Thursday they won’t help Pierre Poilievre’s Conservatives topple the government next week, and intend to join the Bloc Québécois in blocking the Tories’ non-confidence motion.
The planned votes from the Bloc and the New Democrats eliminate the possibility of a snap election, buying the Liberals more time to govern after a raucous start to the fall sitting of Parliament.
Poilievre issued a challenge to NDP Leader Jagmeet Singh earlier this week when he announced he will put forward a motion that simply states that the House has no confidence in the government or the prime minister.
If it were to pass, it would likely mean Canadians would be heading to the polls, but Singh said Thursday he’s not going to let Poilievre tell him what to do.
Voting against the Conservative motion doesn’t mean the NDP support the Liberals, said Singh, who pulled out of his political pact with Prime Minister Justin Trudeau a few weeks ago.
“I stand by my words, Trudeau has let you down,” Singh said in the foyer outside of the House of Commons Thursday.
“Trudeau has let you down and does not deserve another chance.”
Canadians will have to make that choice at the ballot box, Singh said, but he will make a decision about whether to help trigger that election on a vote-by-vote basis in the House.
The Conservatives mocked the NDP during Question Period for saying they had “ripped up” the deal to support the Liberals, despite plans to vote to keep them in power.
Poilievre accused Singh of pretending to pull out of the deal to sway voters in a federal byelection in Winnipeg, where the NDP was defending its long-held seat against the Conservatives.
“Once the votes were counted, he betrayed them again. He’s a fake, a phoney and fraud. How can anyone ever believe what the sellout NDP leader says in the future?” Poilievre said during Question Period Thursday afternoon.
At some point after those comments, Singh stepped out from behind his desk in the House and a two-minute shouting match ensued between the two leaders and their MPs before the Speaker intervened.
Outside the House, Poilievre said he plans to put forward another non-confidence motion at the next opportunity.
“We want a carbon-tax election as soon as possible, so that we can axe Trudeau’s tax before he quadruples it to 61 cents a litre,” he said.
Liberal House leader Karina Gould says there is much work the government still needs to do, and that Singh has realized the consequences of potentially bringing down the government. She refused to take questions about whether her government will negotiate with opposition parties to ensure their support in future confidence motions.
Bloc Québécois Leader Yves-François Blanchet hasn’t ruled out voting no-confidence in the government the next time a motion is tabled.
“I never support Liberals. Help me God, I go against the Conservatives on a vote that is only about Pierre Poilievre and his huge ambition for himself,” Blanchet said Thursday.
“I support the interests of Quebecers, if those interests are also good for Canadians.”
A Bloc bill to increase pension cheques for seniors aged 65 to 74 is now at “the very centre of the survival of this government,” he said.
The Bloc needs a recommendation from a government minister to OK the cost and get the bill through the House.
The Bloc also wants to see more protections for supply management in the food sector in Canada and Quebec.
If the Liberals can’t deliver on those two things, they will fall, Blanchet said.
“This is what we call power,” he said.
Treasury Board President Anita Anand wouldn’t say whether the government would be willing to swallow the financial implications of the Bloc’s demands.
“We are focused at Treasury Board on ensuring prudent fiscal management,” she said Thursday.
“And at this time, our immediate focus is implementing the measures in budget 2024 that were announced earlier this year.”
This report by The Canadian Press was first published Sept. 19, 2024.
OTTAWA – Treasury Board President Anita Anand has been sworn in as federal transport minister at a ceremony at Rideau Hall, taking over a portfolio left vacant after Pablo Rodriguez resigned from cabinet and the Liberal caucus on Thursday.
Anand thanked Rodriguez for his contributions to the government and the country, saying she’s grateful for his guidance and friendship.
She sidestepped a question about the message it sends to have him leave the federal Liberal fold.
“That is a decision that he made independently, and I wish him well,” she said.
Prime Minister Justin Trudeau was not present for the swearing-in ceremony, nor were any other members of the Liberal government.
The shakeup in cabinet comes just days after the Liberals lost a key seat in a Montreal byelection to the Bloc Québécois and amid renewed calls for Prime Minister Justin Trudeau to step down and make way for a new leader.
Anand said she is not actively seeking leadership of the party, saying she is focused on her roles as minister and as MP.
“My view is that we are a team, and we are a team that has to keep delivering for our country,” she said.
The minority Liberal government is in a more challenging position in the House of Commons after the NDP ended a supply-and-confidence deal that provided parliamentary stability for more than two years.
Non-confidence votes are guaranteed to come from the Opposition Conservatives, who are eager to bring the government down.
On Thursday morning, Rodriguez made a symbolic walk over the Alexandra Bridge from Parliament Hill to Gatineau, Que., where he formally announced his plans to run for the Quebec Liberal party leadership.
He said he will now sit as an Independent member of Parliament, which will allow him to focus on his own priorities.
“I was defending the priorities of the government, and I did it in a very loyal way,” he said.
“It’s normal and it’s what I had to do. But now it’s more about my vision, the vision of the team that I’m building.”
Rodriguez said he will stay on as an MP until the Quebec Liberal leadership campaign officially launches in January.
He said that will “avoid a costly byelection a few weeks, or months, before a general election.”
The next federal election must be held by October 2025.
Conservative Leader Pierre Poilievre said he will try to topple the government sooner than that, beginning with a non-confidence motion that is set to be debated Sept. 24 and voted on Sept. 25.
Poilievre has called on the NDP and the Bloc Québécois to support him, but both Jagmeet Singh and Yves-François Blanchet have said they will not support the Conservatives.
Rodriguez said he doesn’t want a federal election right away and will vote against the non-confidence motion.
As for how he would vote on other matters before the House of Commons, “it would depend on the votes.”
Public Services and Procurement Minister Jean-Yves Duclos will become the government’s new Quebec lieutenant, a non-cabinet role Rodriguez held since 2019.
This report by The Canadian Press was first published Sept. 19, 2024.
— With files from Nojoud Al Mallees and Dylan Robertson
