Will inflation be a horror or a healthy readjustment? Economists clash over the basics

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What happens in Vegas stays in Vegas, but as Bank of Canada Governor Tiff McCalem recently remarked, the same thing doesn’t apply to what happens in the financial markets.

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“It has a real impact,” Macklem told the US Council on Foreign Relations in October. And this week, some newly released data from the same month is likely to prove them correct.

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On the heels of last week’s US inflation data shocked politician And volatile markets, Canada will get its October reading on rising prices on Wednesday.

from Nero to Newton

For a phenomenon observed in Nero’s Rome and studied by some of humanity’s best minds, including Sir Isaac Newton – who, in addition to replacing physics with his own laws of motion, battled inflation as master of the Royal Mint – Modern scholars are surprisingly divided on the subject.

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If history is any guide, it is the times of inflation. can cause disturbance, This week, financial markets will be eagerly waiting to see how close Canada’s inflation rate comes to a US gain of 6.2 percent.

But even if price increases reach a mere five percent by the end of the year – a number Macklem himself suggested at the last monetary policy news conference in late October – changes in prices at those levels could weigh heavily on Canadians’ lives. can have negative effects.

Those impacts include the pain of shrinking spending power, the potential for labor conflicts as workers struggle to regain their spending power, potential disruption to Canada’s growing housing market, and a rethink about older people. How to Build Your Money Through a Long Retirement

Just like in the United States, where President Joe Biden is using anti-inflation to attack government policySome critics of Canada say rising inflation will have negative consequences Canada’s governing liberals,

Of course, it depends on whether you think the current fight against inflation is good or bad, what are its causes, what could be the remedies and how long it will last. Canadians who envision economics as a discipline with clear rules and definite consequences may be surprised to learn that all of these things are in dispute.

Is inflation good or bad inflation?

Last week, commentator John Schwarz, writing in The Intercept, proposed a take on the economic logic of why inflation is good – a natural repair mechanism peculiar to an economy.

“Inflation is bad for 1 percent, but helps almost everyone,” says the headline at the top of Schwarz’s story.

Central to the argument is that for people who have large debts, inflation makes them smaller in dollar terms. As wages and prices rise, debt can be paid off in increased dollars. For lenders or those with a plethora of cash, the effect is the opposite.

It’s clear that those saving for retirement may take a different approach, especially as the boomer boom kicks off the labor market. Even before the latest round of pandemic monetary stimulus, those contemplating a longer retirement complained of a modest return on savings. With inflation exceeding interest rates, cautious savers are now watching with horror as their future spending power is eroding.

And that disparity isn’t just in favor of savers. As Hilliard Macbeth, an Edmonton-based financial advisor and author when the bubble burstsAs seen, even before the latest US inflationary surprise, lenders have been handing out mortgages at rates far below the rate of inflation.

“Even three percent makes no sense in 5.4 percent [consumer price index] world,” Macbeth tweeted.

But as he points out, it depends on whether you think inflation is settling in the long run or, as central bankers have long emphasized, it is a short-term, “transient” effect. which is caused by events related to the COVID-19 pandemic. ,

Mortgage loans boost the money supply

Economist Michael Devereaux of the University of British Columbia believes that one-time effects, such as shipping bottlenecks, are the main forces driving rising prices. But like others, he isn’t sure the effects of inflation will disappear once Canadians have expected it. People can demand higher wages and higher prices to businesses as they try to capture inflation.

Another strong contender for the cause of inflation – the influx of new money into the economy caused by central banks – has drawn heated debate among economists.

a. A simple graph showing the relationship in financial post commentary By Simon Fraser University economist Herbert Grubel prompted a response from Trevor Tombe of the University of Calgary, showing a graph absolutely opposite or no relation at all,

Billions of dollars are being created out of thin air by the housing boom in Canada, as outlined in a concise and sweet analysis by the Library of the Parliament of Canada.

“Most of the money in the economy is made by commercial banks when they take out new loans, such as mortgages,” says report published in May, As mortgage loans increase with rising real estate values, the impact is far greater than that of central bank bond purchases.

The idea that inflation is caused by an influx of money to drive up the price of those goods, chasing a limited amount of goods, has the merits of feeling intuitively correct, but as our central bankers consistently tell us, Economies are not stable. They say a little extra stimulus is still needed to tap the excess capacity, make the economy stronger and more productive.

The trouble with trying to understand inflation – like trying to understand a complex system – is that the human brain, not being omniscient, cannot understand all the working parts of the economy. And in such an interdependent system, it may be wrong to imagine that there is a discrete cause or a simple solution.

Earlier last week, Macklem was widely quoted as saying that Canada’s inflation was “temporary but not short-lived.”

look | Rising food prices contributed to 18 years of high inflation

By that measure, all inflation is transitory, as it comes on for a while and then disappears again after months or years.

But one thing many economists agree on is that in the short term, central bankers should start raising interest rates, perhaps earlier than they had planned only months earlier.

Even if disruptive to those who believed last year the majority believed inflation and rates to remain the same, a rate hike would not be an immediate fix. Studies suggest that it may take up to two years for their inflation-fighting power to take full effect.

follow don on twitter @don_pittis

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