Canada and the inflation race

by Maj (ret'd) CORNELIU E. CHISU, CD, PMSC, FEC, CET, P. Eng. Former Member of Parliament Pickering-Scarborough East Summer is here and the hot days finally came together with some hot news from the Bank of Canada, which raised the prime rate by one entire point, using the excuse of dealing with inflation. Currently the prime rate is at 2.5%. The latest prime rate hike made by the Bank of Canada on 13th of July was the largest single increase in more than 20 years. No wonder the rate of inflation in June reached a 39 year high of 8.1%, boosted by soaring gas prices, which rose more than 50 % compared with a year ago, Statistics Canada said last week. Inflation is expected to increase further in July. As the cost of living has continued to rise, wages in Canada continue to lag, rising 5.2% in June on a year over year basis. In a common sense approach there are very few people in Canada who aren't feeling the pressures of bonkers inflation right now, with the cost of just about everything hitting sky-high levels and continuing to rise. The prices of food and gas have been hurting people's wallets the most as we hit a 40-year inflation high in June and wages are certainly not keeping pace. The crisis is only bound to get worse now that food suppliers have said that even more price increases are coming. Excluding gasoline, the inflation rate was 6.5 % in June compared with 6.3 % in May. With public health restrictions easing and more people looking to travel in June, the cost of travel-related services surged. Prices for accommodation rose by about 50 % across the country compared with a year ago. "The return of sporting events, festivals and other large in-person gatherings has resulted in higher demand for accommodation, particularly in major urban centres," Statistics Canada reports. On a month-over-month basis, the consumer price index edged higher by 0.7%, largely due to rising prices for gasoline and travel accommodations. After declining slightly in May, air transportation costs rose 6.4% month-over-month. Canadians also continued to see higher food prices, with the cost of food up 8.8% compared with June last year. Among food items, the largest increase in prices was for edible fats and oils, which rose by 28.8 % year-over-year. So let us look at who benefits most from inflation. The answer is, that governments benefit from inflation in two significant ways. First, because inflation increases the price of goods and services, the value of money effectively declines-as does the value of debt. When the value of debt declines, the cost of debt interest payments also essentially declines. Second, inflation tends to increase the nominal value of assets such as real estate, which increases the capital gains tax liabilities of Canadians who sell those assets, thereby pushing some Canadians into higher tax brackets. Consequently, government tax revenues will increase even though the "real" incomes and wealth of most Canadians may remain constant or even decrease. So in Canada our liberal government is ready to benefit from the rise of inflation. No wonder they are spending money left, right and center, on illusory projects, especially squandering it outside the country, instead of looking to the welfare of their own citizens. There is also a known link between the rise of inflation and a potential for an economic downturn. Despite reassurances from the Trudeau government that the Canadian economy is on the road to recovery, there are signs that a recession is fast approaching in Canada. A culmination of fast rising inflation, increased interest rates on mortgages, international events such as worsening relations with China and sanctions on Russian energy and a contracting US economy all point to a Canadian economy that is on the brink of recession. As the Bank of Canada continues to hike rates, the sale of homes in May 2022 fell by 9%, contributing to a 0.1% contraction of GDP. The effect of a slowing housing market is likely to take a bigger toll on the Canadian economy than on the American economy, as Canada is more than twice as reliant on the housing market for economic growth as the US. The housing market dragging Canada's GDP down could lead to a much more severe recession, causing increased unemployment and the recession to drag on longer. China's recent economic contraction is also stunting economic growth worldwide. China is Canada's second-largest trading partner, and therefore supply chain issues occurring in China have ripple effects, especially with regard to Canadian imports. Despite reassurances from Finance Minister Chrystia Freeland that the government is focused on "fiscal restraint," the Trudeau government continues to spend at an astronomical rate, causing the economy to overheat. Keeping all this in mind, be prepared for more restrains and tightening of the belt. Hopefully there are no new pandemics on the horizon. Enjoy the summer while it lasts!