Commentary
Inflation in Canada (measured by the Consumer Price Index) reached 5.1% in January as prices soared in pumps and checkout lines. Best Rate since 1991.
The Bank of Canada raised the policy rate from 0.25% to 0.50% on March 2, but the central bank may need to do more. address Current inflationary pressure. To some extent, central banks in Canada and other advanced economies have awakened to the unpleasant reality of long-term price stability issues after maintaining for months that new inflation primarily reflects temporary factors. It seems that.
In fact, central banks may now be facing a storm of full inflation.
Simply put, inflation occurs when the “aggregate demand” of goods and services in an economy exceeds the economy’s ability to supply that aggregate demand at current price levels. Prices must rise to distribute excess demand for supply. The gap between aggregate demand and the economy’s ability to supply goods and services, the potential output of the economy, can be affected by several factors that change in importance over time.
Aggregate demand is a function of the money supply and is usually measured by the “M2” where analysts aggregate check accounts, savings and time deposits, and money market funds. The speed of the money supply is measured by the turnover rate of the money supply. .. So if the money supply for a particular period is equal to $ 100 and you spend $ 200, the speed of money will be 2. Therefore, aggregate demand increases with the increase in the money supply and / or the speed of money circulation.
Potential output is a function of the number of workers and the average productivity of the workforce. An increase in the supply of labor and / or the average productivity of the labor leads to an increase in the potential output of the economy. If potential GDP does not increase above aggregate demand, the result is inflation.
Until recently, central banks have blamed temporary declines in labor productivity and therefore inflationary pressures due to the global supply chain disruptions associated with COVID. In fact, labor productivity growth in Canada, the United States, and the European Union averaged less than 1% annually between 2012 and 2019, with the exception of the United States, where labor productivity growth slowed in the second half of the year. .. More time than the first. This represents a disastrous labor productivity performance by historical standards.
There is no clear reason to expect significant growth in labor productivity in the future. Indeed, the move to significantly reduce carbon fuel use and what appears to be the end of global trade and investment liberalization can help further slow productivity growth. Also, we should not expect a rapid increase in labor supply to compensate for the slowdown in productivity growth. The aging of developed countries over the next 20 years suggests that the workforce is stagnant, if not declining.
Sharp on the demand side gain Canada’s money supply has undoubtedly contributed to the recent surge in inflation. Specifically, M2 increased 28% from December 2019 to December 2021 and increased 13.4% from December 2017 to December 2019. Obviously, aggregate demand will continue to increase significantly unless the growth rate of funding drops significantly or the turnover rate of funding drops sharply. As inflationary pressures increase, households and businesses accelerate purchases ahead of expected highs, so the rate is more likely to rise than slow.
In short, the various determinants of inflation continue to represent serious and ongoing dangers. Central banks, including Bank of Canada employees, must overcome the storm of inflation, as has not been seen for at least 40 years.
The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.
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Steven Globerman is a resident student at the Fraser Institute.