We are trying to balance the risks of under- and over-tightening monetary policy. If we don’t do enough now, we will likely have to do even more later. If we do too much, we risk making economic conditions unnecessarily painful for everybody…
— Bank of Canada Governor Tiff Macklem
I am not now, nor ever have been, an economist. But I have questions. And concerns. And confusion… Lots of confusion.
Let’s start with the Bank of Canada’s obsessive, reflexive, ongoing campaign to crush inflation and slow “out of control” economic growth. To achieve that end, the bank has ratcheted up interest rates, driving up the costs of life for ordinary Canadians charged with the crime of … well, living.
If they can make us suffer enough so they have less to spend and therefore spend less, life will get better for all of us. Or so the reasoning goes.
When the Bank began relentlessly goosing up rates in March 2022, its key overnight lending rate — as the economists are wont to say — was just 0.25 percent.
Today, after what Bank officials claim was the fastest series of interest rate hikes in Canada’s history, that rate is 5 percent, the highest it has been since 2001.
When the bank first began raising interest rates, inflation was already trending upward. In March 2022, the annual rate of inflation was 6.8 percent; by June of that year, it would peak at 8.1 percent.
Today, it is just 2.8 percent.
That must mean the Bank of Canada’s plan is working, right?
But let’s back up that Brinks truck a second.
Lat’s recall what was happening in the wider world back in the spring of 2022.
On February 24, 2022, Russia invaded Ukraine, disrupting international trade, further gumming up global supply chains still reeling from COVID-19, and driving up prices for almost everything that matters, as wars tend to do.
In March 2022, for example, the price of a barrel of Brent crude oil — a global benchmark — hit US $117.25, an increase of $20.12 a barrel in just one month, capping a year of war posturing during which the price of oil increased by a whopping 80 percent.
In Canada, the result, according to Statistics Canada, was that drivers paid 28.5 per cent more to fill their tanks in 2022 than they did the year before.
Talk about inflation!
Today? The price of that barrel has fallen more than $40 to just $74.35 a barrel.
How much of that global oil price collapse, do you suppose, is the result of the Bank of Canada’s war on inflation?
Can you say… nada, zippo, zilch?
So what causes the fluctuations in oil prices? Lots of different things. To whit:
BENGALURU, July 14 (Reuters) – Oil prices fell more than a dollar a barrel on Friday as the [US] dollar strengthened and oil traders booked profits from a strong rally, with crude benchmarks recording their third-straight weekly gain.
“It just appears to be some profit taking, with some demand concerns coming back to the front and center as the dollar rebounds,” said John Kilduff, partner at Again Capital.
No mention of the Bank of Canada there.
What do these latest fluctuations augur for future prices? Probably not much.
Next week, however, the rally could resume as easing inflation, plans to refill the U.S. strategic reserve, supply cuts and disruptions could support the market, said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
And blah blah.
Too many Canadians, of course, especially those of us in Atlantic Canada, still depend on oil and gas to heat and cool homes. We have little immediate control over the vagaries of the international market.
So, while the Bank of Canada’s policies do nothing to tame our oil and gas prices, the bank’s interest rate hikes do drive up our overall cost of living.
Mortgages, rent, travel, food…
Food? Statistics Canada reports that the prices of food purchased from stores in 2022 increased by nearly 10 percent, the fastest rate of increase since 1981.
While food prices have been affected by a variety of factors beyond the control of the Bank of Canada or the grocery chains — “extreme weather, higher input costs and supply chain disruptions” — the reality is that food industry corporate profits have increased exponentially while the Bank of Canada has been trying to drive down hourly wage increases.
As the Canadian Centre for Policy Alternatives senior economist, David Macdonald, laid it out for a Commons committee in April of this year:
According to industry data from Statistics Canada, the past three years have been great for the food and beverage store industry. Net pre-tax profit in the industry sat just above $3 billion a year for several years pre-pandemic—but by 2022 they were $6.5 billion, more than double where they stood in 2019.
Net pre-tax profit margins tell a similar story, they stood at 2.1 percent in 2019 but by 2022 they stood at 3.6 per cent. Put another way, grocery stores used to keep $1 out of every $50 that came in the till, now they keep $1 out of every $28 as profits.
The input costs for the industry have increased by 21 percent since the end of 2019, an argument the industry loves to repeat loudly. The trouble with this argument is that their revenues have increased 27 percent over the same period. It’s perfectly possible to pass on higher costs to consumers, and then some, resulting in higher profits.
Our food pain hasn’t just been good for grocery chain bottom lines, it’s also padded the pay packets of the CEOs who run those grocery chains.
Galen Weston’s compensation as head of Loblaw’s increased a whopping 55 per cent last year to an even more eye-popping $8.4 million, while his opposite number at Empire (Sobeys), Michael Medline, fared even better, taking home $8.7 million with which to put food on his table.
You may be surprised, or not, to realize such egregious corporate and personal profiteering — which inevitably impacts the prices we pay for food, thus contributing to inflation and the Bank of Canada’s false fixation on interest rates as the solution to what ails the economy — has barely stirred the notice of our Bank of Canada overlords.
Workers’ wages, on the other hand, have been in the crosshairs of the bank’s policymakers since the beginning. In a report in July 2022, the Bank noted the dangers of what it called the wage-price spiral 13 times.
A month later, the Bank of Canada’s senior deputy governor complained about those pesky workers: [they are] “looking at the rate of inflation and what it’s doing to their purchasing power, their budgets, and they’re looking at the same tight labour markets and they’re thinking ‘I need a raise.’”
How unpatriotic of them.
From April 2019 to April 2022, average hourly wages grew 12.5 percent compared with a 10.1 percent increase in the CPI over the same period.
However, consumer prices rose faster than average hourly wages on a year-over-year basis from October 2021 to April 2022, meaning Canadians experienced a decline in purchasing power. The latest data show that from July 2021 to July 2022 there was a 7.6 percent increase in consumer prices, while average hourly wages rose 5.2 percent.
In fact, it wasn’t until this June — after the Bank had raised its interest rate yet again — that it finally, belatedly noted, almost as an afterthought, the role of corporate profits in its inflation equation:
We will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target.
That horse is already out of the barn and deep into the next county,
So let’s review.
- The major reasons for the current reduction in the pace of inflation have almost nothing to do with the Bank of Canada’s interest rate policies.
- The Bank’s focus on keeping workers’ wage increases low while looking the other way at excessive corporate profits and personal wealth is simply increasing inequality in Canada.
As I mentioned — I did mention — I am not an economist. But Armine Yalnizyan is. She is past president of the Canadian Association for Business Economics and advisor to the Government of Canada on Women in the Economy, as well as the Atkinson Fellow in Public Policy and a contributing columnist for the Toronto Star’s Business section.
Given the underlying dynamics of what’s pushing prices up or down, the idea that central banks raising rates is why inflation is being ‘tamed’ seems rather boastful…
The information system is skewed toward ‘business news’ about investments, stock markets and maintaining the status quo.
But the status quo is exactly what needs to be examined. Canadian economists need to get serious about the question Canadians are all asking: Are central banks taming inflation or just raising my costs?
Because without better arguments, rate hikes are looking increasingly like performative art.
A version of this column originally appeared in the Halifax Examiner.
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