Inflation should worry the Left, too
Is it the 1970s, all over again? After being quiescent for so long that most Canadians had almost forgotten it existed, inflation has roared back, clocking in at 4.7 per cent, year-on-year, in October, up from 4.4 per cent in September. A subject that for the last couple of decades has been confined to arcane academic debate is now animating conversations at the kitchen table and has become a potent political issue for the first time in a generation.
To understand the roots of the resurgence in inflation, we need to look back to the global financial crisis, caused by the collapse of the subprime mortgage market in the United States. To fight a serious economic downturn following the collapse of Lehman Brothers in September 2008, central banks turned to “unconventional” monetary policies — in particular: large-scale asset purchases, commonly known as “quantitative easing”; policy interest rates at or near zero (or “the zero lower bound”); and unprecedented “forward guidance” (i.e., promises or signalling about future policy). At bottom, central banks made credit available almost for free and flooded the financial system with liquidity.
By 2014, it was becoming clear that these newfangled policies were a cure worse than the disease. Near-zero interest rates in the advanced countries meant there was nowhere in the real economy that all the money sloshing about could earn a decent rate of return. Many investors parked their money in assets that are in relatively fixed supply — notably, real estate — and sought out higher returns in financial markets. The result: asset prices that were frothy, verging on bubbly, in real estate and financial markets the world over, while the real economy sputtered.
Until recently, consumer price inflation has been relatively subdued, but asset price inflation has outpaced it. The CPI in Canada rose only 1.6 per cent per year on average between 2007 and 2020. But, over the same period, the TSE/SP composite index rose an average of 3.9 per cent per year, while house prices were up an average of 5.9 per cent per year. Average hourly wages did rise 2.9 per cent per year on average, which means workers modestly beat inflation. But Canadians invested in stocks or property did considerably better.
Many central banks, led by the U.S. Federal Reserve, were taking the first, tentative steps back to normalcy when the world was hit by the COVID-19 crisis in March 2020. Suddenly, all attempts at normalization were jettisoned, and the spigots — both fiscal and monetary — were turned wide open again. The twin guides of fiscal prudence and sound money, which had barely survived the financial crisis, were abandoned altogether.
The fact that inflation had stayed quiet for more than a decade after the global financial crisis, apparently calling into question the conventional economic wisdom that excessive money growth will eventually fuel price rises, engendered smug confidence in the-powers-thatbe that there was no downside to loose money. But they were wrong, potentially catastrophically wrong. There is now the real danger inflation will persist and get baked into the public’s expectations, thus setting up the possibility of the vicious circle of a wage-price spiral of the kind that, fuelled by irresponsible monetary policies, gave us the “stagflation” of the 1970s.
Of all people, those on the Left should be most concerned by this, yet they remain largely quiet. Some, such as Jon Schwarz, even argue that inflation is a bogeyman created by the capitalist class. The truth is that when inflation hits people at the top end of the income and wealth distribution are often able to take care of themselves. The stocks and real estate they disproportionately own will often keep pace. Likewise, people at the very bottom of the distribution often receive most of their income in the form of indexed government cheques, largely insulating them. People in the middle, however, which is most people, are often the most vulnerable to inflation. They’re not so nimble or sophisticated financially, and many of their assets are non-indexed savings accounts or term deposits. You would think a government that during its first six years in office proclaimed itself to be the champion of the middle class and those working hard to join it would take that fact very seriously.
But the opposite happened. When asked about inflation during the election campaign, the prime minister blithely brushed off the question, asserting that he doesn’t “think about monetary policy.” More recently, Conservative finance critic, Pierre Poilievre, has shown that he thinks about little else. If inflation continues to eat into the pocketbooks of average Canadians, the Tories may finally have found the wedge issue for a future election that eluded them in the last.