Inflation in Canada skyrocketed 40 years ago. Is today’s price increase any different? – Nation

Inflationary in Canada continues to increase though Bank of Canada efforts to slow price growth, with some economists and central bank governors themselves expecting higher results in the June report to be released on Wednesday.

Inflation, which hit an annual rate of 7.7% in May, has topped the Bank of Canada’s estimates through the first half of 2022.

Tiff Macklem, who holds the highest office at the central bank, told a group of business owners last week that inflation is likely to peak at 8.0% in the appropriate time. The Bank of Montreal (BMO) said in its updated inflation forecast earlier this week that it expects inflation to average 8.3% in the third quarter of the year.

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The higher the temperature rise on Canada’s inflation thermometer, the more Canadians of a certain age go back to the 1970s and 80s, when annual inflation hit 12.5% ​​in 1981.

At the time, the Bank of Canada was forced to raise its benchmark interest rate to 21% to bring prices back in control, triggering the deepest recession since the Great Depression.

Experts told Global News that there are some striking similarities between today’s run of inflation and the price pressures of 40 years ago – as well as some key differentiating factors that could mean the difference between achieving a recession or achieving the “soft landing” that the central bank is pursuing.

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

He then notes that the causes of today’s inflation – rising food, fuel and housing prices – are the same causes of higher Canadian prices in two different periods, one in the early 2000s. 1970s and one at the end of the decade, which lasted until the 1980s.

“Inflation now is very similar to what happened back then,” he told Global News.

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

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

Meanwhile, meat prices skyrocketed 70 percent in 1978, according to Orlando’s analysis, leading to higher costs in fast food outlets, something many Canadian households today feel familiar with. look at their grocery bill.

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Orlando rewritten in April that while today’s price increase may not be to the extent of the 70s and 80s, it can feel substantial. When inflation hits the staples we buy regularly in the grocery store, it will trigger a more backlash from consumers, he explains.

But while prices were high, Canadians also spent heavily throughout the ’70s thanks to rapidly rising wages and low interest rates.

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

In the 70s, he said, it made more sense to borrow than to invest and buy later, because interest rates were low and tomorrow’s prices were expected to be higher than any returns from savings and investments.

“Saving doesn’t mean anything. So it created a culture of spending, spending, spending, borrowing, borrowing,” he told Global News.

Lee says many Canadians – including him – have put money into the house. The rise in housing prices as Canadians flocked to the market only fueled inflation.

Shelter is also the main driver of today’s inflation, with Rent is currently increasing At the same time, higher interest rates make mortgages more expensive.

Lee says that one of the most important differences between today’s inflation and the inflation of the 1970s is the tightening of the labor market.

The 1970s and 80s saw inflation stagnating – economic growth slowed and unemployment was high with prices soaring.

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

Macklem pointed to strong labor force indicators as evidence that the economy can drive interest rates higher, even if some economists dismissal warning will follow if the bank is too active.

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Too much too soon? Experts say rapidly rising interest rates are pushing Canada closer to recession

Indeed, when the Bank of Canada had to raise its policy rate above the 20% mark in the 1980s, after the US Federal Reserve entered its “war on inflation”, the economic pain The economy became even more intense: the unemployment rate rose to 12 percent in 1983.

Lee said the only reason interest rates had to be so high at the time was that the Bank of Canada didn’t recognize the inflation crisis before it was too late – prices skyrocketed over the course of more than a decade, compared with the sudden increase in just a few months that we are seeing today.

Central banks around the world mostly didn’t use their policy rates to tackle inflation at that point in history. Canada was one of the first countries to adopt inflation targeting as a mandate in 1991.

Although Lee believes the Bank of Canada has waited too long to address the boiling inflation, today’s response is years ahead of the 1980s response.

“The longer you delay taking your medication, the worse the problem becomes. And the drug becomes more persistent,” he said.

Lee predicts interest rates will not have to be as high as 40 years ago and the Bank of Canada has responded promptly to double-digit inflation.

Orlando said that for now, 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 for keeping expectations in line. and prevent high inflation from becoming entrenched.

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

In its forecast this week, the BMO predicts that inflation will peak in the third quarter of 2022, fall to an average of 8% in the fourth quarter, and then decline steadily through 2023.

Tu Nguyen, an economist at RSM Canada, told Global News that there are signs that inflation could peak this summer, but that what determines that is largely beyond the Bank of Canada’s target.

Oil prices have shown signs of falling over the past month from their peak last spring, and aggressive action by central banks around the world will dampen consumer demand and give supply chains time to catch up. .

However, while global pressures show signs of easing, they could easily prolong or even reverse course throughout the fall, Nguyen warned.

“There is still a war going on,” she said. “There is a lot of uncertainty, geopolitical tensions and pandemics raging. And who knows what will happen on the global stage in the next six months. “

– with files from Global News ‘Anne Gaviola