New Economic Problems on the Horizon in Canada

by Maj (ret'd) CORNELIU. CHISU, CD, PMSC, FEC, CET, P. Eng. Former Member of Parliament Pickering-Scarborough East As Canadians, we continue to enjoy our short summer and look forward to the fall, though it may not be a very nice one. Inflation continues to raise its ugly head and that means that the Bank of Canada will probably bump up interest rates even further in September. As outlined by journalist Pete Evans’ realistic analysis of the situation, we are not looking forward to getting out of these economic worries any time soon. Canada's inflation rate bucked its recent trend of slowing last month and rose at a 3.3 per cent annual pace in July, Statistics Canada said’. That was an increase from 2.8 per cent the previous month. Gas prices were a major factor pushing up the inflation rate, mostly due to what economists call the base effect. For most of the past year, the cost of gasoline has been a big factor dragging down the overall rate. However, as you may have noticed, prices are up again. Pump prices increased by 0.9 per cent in July. The same month a year earlier, they declined by more than 9 per cent. Gas prices weren't the only type of energy bill that was a big factor in pushing up the inflation rate. The price of electricity skyrocketed in the past year, up by 11.7 per cent. That's more than twice the annual increase of 5.8 per cent clocked in June and the biggest reason for the uptick was a more than doubling of electricity bills in Alberta, which rose by 127.8 per cent in the year up to July. Food prices, another factor that has been driving up the cost of living, eased somewhat during the month, but they are still going up at an eye-watering pace. Grocery prices increased by 8.5 per cent in the year up to July. That is an easing from 9.1 per cent the previous month, but still three times the overall inflation rate. Not every grocery aisle is getting more expensive, or at the same rate. There was some relief in the produce section, with fresh fruit prices seeing their largest month-over-month decline since February 2008, down 6.5 per cent. The price of grapes plummeted by more than 40 per cent last month, according to Statistics Canada. While a slowdown in the rate that food prices are going up comes as some relief, it remains a crisis, which has prompted calls for drastic measures such as price caps on staple grocery items. Other countries, including France and Greece, have dabbled with implementing price controls, where retail prices for core items are capped at a certain level. Similar attempts at price controls in the 1970s had disastrous results, but some policy experts say it is an idea worth exploring, at least on a limited basis. "It's not the '70s anymore, our markets are different," said Vass Bednar, executive director of the Master of Public Policy Program at McMaster University in Hamilton. "We need to recognize that." While Bednar says she does not advocate for a heavy-handed cap on all types of food in perpetuity, she says it makes sense to look into policies that could ensure some basic necessities — baby formula, bread, certain fruits and vegetables — have at least some options that remain affordable. However, Avery Shenfeld, an economist with CIBC, said he does not see the justification for price caps in Canada's grocery business, given the trends we are seeing beneath the surface. "I don't really think we're in need of that here," he said in an interview. "At the end of the day, the best method of fighting inflation isn't to try to pick one or two prices in the economy and intervene in them. It's really to control the pace of spending power [and] moderate growth a little bit." Food prices are not the only thing getting more expensive, either. Mortgages have been another major pressure point in the increasing consumer price index of late, and that problem got worse in July, not better. Mortgage interest costs have increased by 30.6 per cent in the past year. That's another record year-over-year gain, and the largest single factor in the increase in the overall inflation rate. With this said many smart people in the financial sector seem to think a recession is coming. And yet a lot of them also think that before that, central bankers here, in the United States and overseas are going to raise interest rates some more. The fact is fighting inflation is complicated and politically divisive. For central banks, it becomes even more complicated and politically divisive as inflation gets closer to their target, because rate hikes hurt more for less obvious reward. There are few inflation riddles harder to solve than the fact that the Bank of Canada's own interest rate hikes are actually driving inflation higher, with the mortgage cost component continuing to climb. So let us see what is coming and how our politicians will act to ease the worries of Canadians. Any hope?