Inflation is becoming the new normal in Canada

While its foundation was poured during the pandemic and the economic lockdowns that followed, inflation is now driven by a far more powerful and lasting force — sanctions.

Economic warfare promises to finish the job that the economic lockdowns from the pandemic started — the massive realignment of global supply lines.

In the process, the pervasive use of economic sanctions are removing what unquestionably has been the single largest brake on inflation in the postwar period: the ability of foreign trade to replace goods made by workers in high wage countries like North America and Western Europe with goods mass produced by low wage workers in China and elsewhere in the developing world.

The fact that inflation has soared during a period of rapid monetary expansion will come as no surprise to followers of the late American economist Milton Friedman, father of the monetarist school, whose famous dictum “inflation is always and everywhere a monetary phenomenon” has never rung truer.

Explosive money supply growth — which is how central banks like the Bank of Canada paid for their massive purchase of government bonds during the pandemic — was a powder keg just waiting to be lit. And sweeping economic sanctions imposed against Russia, the world’s largest natural resource producer, and now China as well, the world’s largest manufacturer, would provide all the sparking power needed to blow that powder keg sky high.

In the new normal defined by growing global conflict and ever escalating economic sanctions, it is suddenly security, not costs, that matter most. Friendshoring, the new orthodoxy espoused by officials like U.S. Treasury Secretary Janet Yellin, has suddenly replaced offshoring, which for decades was the very essence of globalization.

From a security of supply perspective, the new doctrine makes sense. The only problem is that America’s friends are for the most part highwage economies like itself. Instead of low paid overseas workers manufacturing what we consume, we are now going to make those things ourselves again.

That certainly is a good news story for our deeply hollowed out middle class who are seeing the return of good paying factory jobs that we all thought were gone forever. But it is far from a good news story insofar as inflation is concerned.

Like a cancer that starts out as a local tumour but metastasizes and spreads throughout the body, inflation has metastasized from an initial outbreak in food and energy prices and has now seeped into wages.

That critical inflection point occurs when everyone from autoworkers to airline pilots starts chasing those big headline inflation numbers that soaring food and energy prices brought.

And wages have much to be compensated for. Back in 2022, grocery bills for the average North American household rose by more than 11 per cent — more than five times the 20-year average of two per cent.

Wages just don’t feed into the price of groceries or filling up the tank; they feed into the price of everything. And in today’s world of ever mounting sanctions, offshoring is no longer an option for employers when confronted with rising wage demands from their striking domestic workforce.

So as we have seen in past inflationary cycles, we have reached an inflection point where core inflation (excluding food and energy prices) now surpasses retreating headline inflation. But the retreat in headline inflation is a hollow victory for central banks since the initial shock to food and energy prices has already sparked the dreaded wageprice spiral of yesteryear that made inflation so resilient in the past.

Whether the potentially enormous inflationary implications of sanctions and economic decoupling have been recognized by central banks remains at this point an open question.

While some central banks have already served notice that interest rates will not return to the record lows seen during the pandemic, all steadfastly expect (at least publicly) that inflation will retreat back to previous target ranges (in most cases two per cent) — as if nothing has changed in the world that might impact future price behaviour.

Are central banks now misguided in their attempt to wrestle inflation back down to their target ranges? Are those ranges still attainable on a sustainable basis is a question that central bankers need to ask themselves.

If they are not, why then sacrifice potentially so many jobs through

Instead of low-paid overseas workers manufacturing what we consume, we are now going to make those things ourselves again

policy-mandated slowdowns or recessions that are intended to drive up the unemployment rate in order to drive down the inflation rate — the old Philips curve trade off that globalization made obsolete?

The pre-pandemic, pre-sanctions economy is an entirely different animal than the post-pandemic, sanctions fractured economy that we live in today.

When will central banks recognize this new reality and recalibrate their inflation target accordingly? JEFF RUBIN IS AN AWARD-WINNING AND BESTSELLING AUTHOR AND