Opinion | Nobody likes inflation, but rising interest rates won’t lower your grocery prices

Until a year ago, inflation seemed moribund, or at least very well trained.

Despite years of low interest rates and favorable monetary conditions that were the hallmark of the decade after the Great Financial Crisis of 2008-09, inflation remained stable and low in Canada and elsewhere.

Experts and economists argued that technology, global competition, and the weak power of unions meant that the old formulas were out of date and that consumer prices would remain fairly stable on their own.

In that context, it made perfect sense for our central bank to spread its wings and use its considerable experience and influence over the economy to tackle not only inflation but other factors as well, especially as the pandemic undermined employment and hit years of policy. directed. to moderate inequality.

By fall 2020, Bank of Canada Governor Tiff Macklem emphasized that a strong job recovery was the key to economic recovery, and that the central bank was deeply concerned that underserved populations were being left behind.

It almost sounded as if it had de facto expanded the central mandate of the central bank to maintain a laser focus on inflation to include a broader focus on employment and income distribution.

The federal government followed suit, spending without limit to boost employment while arguing that inflation would stay low regardless of what they did.

what a difference a year makes.

The federal government is set to announce a new five-year term on how the central bank should tackle inflation, and suddenly its pending decision has turned into colder talk (or whatever the work-from-home equivalent is).

Inflation is booming, it is on everyone’s mind as they shop for groceries and gasoline, and it has proven to be highly unpredictable in this era of pandemic. So it stands to reason that the renewal of the Bank of Canada’s monetary policy mandate, which occurs once every five years and is generally without fanfare, is a political hot potato.

The current context makes it obvious that inflation is not only lurking, it is as corrosive as we once believed.

Reuters reported on Thursday (and the Star has verified) that the decision is imminent, and when it arrives it will be close to the status quo, requiring the central bank to prioritize keeping inflation under control and close to two percent. But the government will also include some language that allows the bank a broader focus on employment and the workforce.

We will see in the next few days exactly how much room for maneuver they have, but let’s wait a long time.

That’s because the Bank of Canada’s great hammer in cracking down on inflation is its key interest rate. If rates rise, demand would be expected to cool down because consumers and businesses would have a harder time borrowing and spending. But today, that is an incompatible remedy with dangerous consequences.

Diane Bellemare is an independent senator and economist, and one of the few women on Parliament Hill who is constantly included in the deliberations on how to balance inflation, employment and interest rates.

She puts it this way.

Rising interest rates may cool demand, but today’s high prices are closely linked to supply problems: Products don’t reach manufacturers or retailers in a predictable way, and global markets can’t react quickly enough. to the changing tastes of consumers.

Compare Canada’s economy and its 4.7 percent inflation rate to a cancer patient seeking treatment. Using monetary policy to try to solve Canada’s inflation problem right now, he says, is looking for trouble.

“I would compare that to using very strong chemotherapy. Good cells and bad cells are killed, ”he said in an interview.

She has advocated a dual mandate for the central bank: a formal recognition that economic health is more important than inflation, and that employment must also be taken into account when setting policy. That recognition, he says, would force central bankers and fiscal policy makers to work together and not simply assume that rising interest rates is the answer to inflationary pressure.

A singular focus on inflation could lead to higher interest rates, he says, at a time when Canada should be increasing its capacity to produce more goods and provide retailers and consumers with what they need.

“We need stable and low interest rates to be able to invest,” he said. Otherwise, “we will enter a vicious circle again.”

Bellemare won’t get away with a broader mandate for the central bank per se. But with the added recognition in the bank’s new tenure that jobs matter too, you’ll get a better balance and some recognition that inflation is complicated, changeable, and an odd force to be reckoned with these days.

The economic challenges looming on the horizon are momentous. The recovery from the pandemic is only the first to involve major structural changes in the way we work and operate. The next step is to deal with climate change, while undergoing a major digital transformation in the way we do business.

Those new words in the Bank of Canada’s mandate should last another five years. Hopefully there is enough flexibility to juggle not only the inflationary aftermath of this pandemic, but also the other changes that lie ahead.