Stop listening to the political blathering of Trudeau and O’Toole and tune in to Tiff—the apolitical truth-teller with the power to keep inflation under control.
There’s a lot of politicking going on around inflation.
Both opposition leader Erin O’Toole and Prime Minister Trudeau are busily spreading ‘their’ wisdom. But, frankly, it’s too serious a matter to let the purveyors of the least reliable source of truth–politicians, be the ones to explain the complex topic of inflation.
If you’re worried about inflation, and you should be, then Tiff Macklem, governor of the Bank of Canada is your reliable truth source, and completely independent from the political process.
The Bank of Canada forewarned that there would be increased inflation as our economy came out of the pandemic. Today’s 4.8 per cent inflation rate is higher than expected, but with no previous experience managing through a pandemic, that, too, should come as little surprise.
Inflation can be broken down in two ways. Almost half of today’s inflation rate is caused by price increases due to broken supply chains.
While we were home-bound and couldn’t spend money on services (e.g., trips, restaurants), we went on spending sprees purchasing an excessive amount of durable goods—even as supply chains were struggling with both a pandemic and multiple extreme weather events.
Beef prices are high not because too much money was pumped into the system by the feds, but because of drought conditions on the prairies leading to a shortage of feed and soaring prices. The good old ‘supply and demand’ principle.
The fact that homeowners continued major upgrades to their homes and yards even as lumber shortages were compounded by unprecedented heat, fires and floods in B.C. is another example of consumer-fuelled inflation.
However, the component of inflation that can get out of control and the one we should fear is when inflation gets baked in for the long term and the value of our money drops. That’s where the Bank of Canada becomes our most important ally as we move out of pandemic spending.
The adverse side effect of low interest rates was on full display in 2021 when housing sales, and subsequent soaring prices, were fuelled not so much by government largess but the fact that for the first time in 40 years, mortgage costs (variable rate mortgage was 1.15 per cent) were less than the rate of inflation (3.7 per cent).
The Bank of Canada Governor, Tiff Macklem, has been transparent throughout the pandemic. His latest news conference was clear—the economy has reached pre-pandemic employment, albeit unevenly, and the economy’s output is close to capacity. The cost of borrowing must go up to dampen spending and bring demand in line with supply. Expect at least three interest rate increases in 2022.
If you are debt laden, be proactive—lock in mortgages, refinance loans at lower rates, consolidate debt by transferring high-interest debt (credit card balances) to lower interest loans, pay down lines of credit and curtail consumer debt spending on scarce, overpriced items.
Canada is fortunate that we have the best performing central bank in the world. Since the worldwide economic meltdown in 2008 and now through the pandemic, Canada’s central bank has outperformed all their contemporaries. Even today, Canada’s inflation rate is much lower than most G20 countries, including the U.S.
If you’re worried about inflation, my recommendation—stop listening to the political blathering of Trudeau and O’Toole and tune in to Tiff—the apolitical truth teller with the power to keep inflation under control. Then review your personal financial situation.
No excuses here, we’ve been fairly warned. It’s now our choice whether we get our financial house in order, or not.