Inflation in Canada peaked 40 years ago. Is today’s price jump any different? – National | Globalnews.ca

inflation Canada continues to grow despite of bank of canada Some economists and the central bank’s efforts to cushion price increases, with its governor expected on Wednesday to read even more in June’s report.

Inflation, which hit an annualized rate of 7.7 percent in May, has topped the Bank of Canada’s projections through the first half of 2022.

Tiff McCalem, who held the top position at the central bank, told a group of business owners last week that Inflation likely to top 8.0 percent in due course. bank of montreal (BMO) said in its updated inflation forecast earlier this week that it now expects inflation to average 8.3 per cent in the third quarter of the year.

The higher the temperature on Canada’s inflation thermometer, the more Canadians of a certain age date back to the 1970s and 80s, when annual inflation peaked at 12.5 percent in 1981.

Subsequently, the Bank of Canada was forced to raise its benchmark interest rate to 21 percent to bring prices under control, triggering the deepest economic contraction since the Great Depression.

Experts tell Global News that there are some important parallels between today’s inflation episode and the price pressures of 40 years ago — as well as some key differences that could mean the difference between hitting a recession or getting a “soft landing.” After the central bank.

James Orlando, senior economist at TD Bank, first began by tracking the parallels between today’s period of inflation and previous generation highs in April.

Then, he said that the causes of inflation today – rising food, fuel and shelter prices – were what drove Canadian prices up in two separate periods, one in the early 1970s and one in the later decade. , which spanned the 1980s.

“Current inflation is very much the same as it was then,” he tells Global News.

For example, many economists today point to Russia’s invasion of Ukraine and spillover effects on oil and food supplies as the primary source of global inflation.

In the 70s, the Yom Kippur War, a few years later the Iranian Revolution and the Iran–Iraq War also put heavy pressure on oil prices.

Meanwhile, meat prices, according to Orlando’s analysis, skyrocketed 70 percent in 1978, leading to higher costs in the deli aisle that many Canadian families today will be familiar with looking at their grocery bills.

orlando wrote back in april While today’s price increases may not be of the same magnitude as those of the 70s and 80s, it can seem just as significant. When inflation hits the staples we regularly buy at the grocery store, it elicits a more intense, emotional response from consumers, he explained.

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But when prices were high, Canadians were also spending heavily in the ’70s due to rapidly rising wages and low interest rates.

Ian Lee, associate professor in the Sprout School of Business, remembers working at BMO during that inflationary period, handling mortgages for the bank in 1980.

He says that in the ’70s, it was wiser to borrow rather than invest and buy later, as interest rates were low and yesterday’s prices were expected to outweigh any return on savings and investment.

“There was no point in saving. So it created a real spending, spending, spending, lending, lending, lending culture,” he tells Global News.

Lee said that many Canadians – myself included – put their money in homes. A run-up on housing prices as Canadians rushed to the market only exacerbated inflation.

Shelter has been a primary driver for today’s inflation episode, as well. rents are rising now At the same time, rising interest rates make mortgages more expensive.

Lee says the most important difference between inflation today and the ’70s is the tightness of the labor market.

The stagnation was seen to materialize in the 1970s and 80s – slowing economic growth and still high unemployment with rising prices.

On the other hand, today’s unemployment rate is at a record low of 4.9 percent.

Macklem points to the strong labor force readings as evidence that the economy can grow at a higher rate, even as some economists Warning layoffs will follow suit If the bank is too aggressive.

Indeed, when the Bank of Canada had to raise its policy rate above the 20-percent mark after the US Federal Reserve’s “war on inflation” in the ’80s, the economic pain was intense: the unemployment rate rose to 12 percent. Percentage in 1983

Lee says that the only reason interest rates went back so high was because the Bank of Canada didn’t recognize the inflation crisis before it was too late – prices rose more than a decade compared to the sudden surge that took place in just a few months. what we are seeing today.

Until that time in history, central banks around the world had not primarily used their policy rates to combat inflation. Canada was one of the first to adopt inflation targeting as a mandate in 1991.

Although Lee believes the Bank of Canada waited too long to address bubbling inflation again, today’s response dates back several years to the response of the 1980s.

“The longer you postpone taking medication, the worse the problem becomes. And the harder the medication becomes,” he says.

Lee projects interest rates will not rise as much as they did 40 years ago, and the Bank of Canada has responded in a timely manner to reduce inflation to double-digit figures.

Orlando says that so far, the Bank of Canada has maintained confidence among Canadians and businesses that it will bring inflation back on target — an important tool in its own right to keep expectations in line and prevent high inflation from setting in. .

“The confidence is still there. And I think the inflation target is a big contributor to that.”

In its forecast this week, the BMO projected that inflation would peak in the third quarter of 2022, falling to an average of eight percent in the fourth quarter and following a steady decline through 2023.

Tu Nguyen, an economist at RSM Canada, told Global News that there are signs inflation could peak this summer, but determined that it is largely outside the Bank of Canada’s purview.

Oil prices have shown signs of a fall in the past month from their peak last spring, and aggressive action 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 could easily persist or even reverse through a decline, Nguyen warned.

“There’s still a war going on,” she said. “There is a lot of instability, geopolitical tension and a pandemic raging. And who knows what is going to happen on the global stage in the next six months.”

— With files from Global News ‘Anne Gaviola’