Front Burner - What’s really driving inflation? Politics vs. reality

Episode Date: December 7, 2021

You’ve probably noticed that prices of practically everything — food, gas, haircuts, housing — have been going up lately. Canada’s inflation rate is now the highest it’s been in 18 years. In Parliament, the Conservative party has been pointing fingers at Justin Trudeau’s Liberal government, and calling on them to quit racking up deficits. They’ve even come up with a nickname for the problem: #Justinflation. But economists say this isn’t a normal inflation problem and warn normal solutions may not work.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Angela Starrett. So you've probably noticed lately that prices of pretty much everything have been going up in Canada. Groceries, gas, haircuts, housing, you name it.

It's a big hit to the wallet for sure. I drive less now. I remember the prices used to be $177, then it went to $188, $199, and then it went to $229, and now it's $249. Canada's inflation rate jumped to 4.7% in October, the highest it's been in 18 years. been in 18 years. And since Parliament resumed a couple weeks ago, the Conservatives have been pointing fingers at the Liberal government and all their big spending, calling on them to get things back under control. Have the second worst housing bubble in the world. Is it just inflation? It could have been better had we shown conservation instead of a continuation of the poor excuse of it's just inflation. But the prime minister says he doesn't think much about monetary policy.

That's no surprise. After all, it's just inflation. Conservative finance critic Pierre Poiliev has even come up with a nickname for the problem, just inflation. But according to economists, this isn't a normal inflation problem. And the normal solutions might not work. In a bit, we're going to talk about the politics with CBC Parliament Hill reporter Erin Wherry. But first, we need to break down why your bills are rising. And for that, I'm speaking to Armin Yelnezian. She's an economist and the Atkinson Fellow on the Future of Workers.

Hi, Armin. Hi, Angela. So in super simple terms, can you just break down why we're seeing our cost of living go up right now? Like what's causing this inflation? Well, one of the first things, and this is happening globally, is shipping and logistics has been backed up. In Canada, it's not just the shipyards, but also our transportation networks that have been ruined by climate events. So you've got this transportation backup throughout the entire logistics system in getting products that have already been made to you. Also inputs to be, you know, to be able to make other products. And that leads me to production and supply chains being disrupted by COVID.

First of all, COVID shut down production in lots of different countries, which leads to fewer inputs coming to us. So we have had disruptions in supply chains, both international and domestic, that have slowed down things coming to market and consequently raising the prices for that. You know, you saw it early in the game when you couldn't go out and go to restaurants, but you could go and renovate your porch. So the price of lumber just spiked at the beginning. In March 2020, a dollar bought you this. A year later, that same dollar bought you this. A year later, that same dollar bought you this.

So in one year, you went from getting three feet of two by four to one foot. The difference is inflation. That's kind of settled now. But now we're seeing spikes in other prices. The third is OPEC and gas prices. All eyes will now be on OPEC plus countries, which includes Saudi Arabia, other Gulf nations and Russia. There's a big risk for them if they get the production numbers up too high because they're not sure what underlying economic growth looks like. A fight for control of the global energy market could now be underway.

We have no control over global commodity prices, especially gas, and certainly demand outstripped supply as economies started to reopen around the world. But OPEC still calls the shots on what the global price is. The next is interest rates. The things that we always think about, you know, is the bank's interest rates too low? Should they go up a bit? Is that what's driving housing prices?

The next is labor shortages, which we've been hearing off and on in relationship to both prices, but also can't get production started. And finally are the climate events that have led to things like transportation backups. So logistics, production, gas prices, interest rates, labor shortages, and climate events all are driving the current inflation we're experiencing in housing, in food prices, and gas pumps, roughly from different vantage points. But those are the

drivers and they're all over the map, aren't they? And I guess another theory about the problem here is something we've heard from the federal conservatives, basically, that the federal government has been racking up huge deficits. And that's what's leading to this inflation. And we'll be getting more, I guess, into the politics in just a few minutes. But for now, speaking as an economist, to what extent do you think the federal government spending is contributing to this inflation problem we're seeing? is a global pandemic and consequently has global implications for prices and deficits, there seems to be actually very little relationship between the size of a deficit that the country is dealing with and the pace of inflation. You know, the countries with the highest government debt, which is Japan, Greece and Italy and US don't have a consistent relationship with inflation. And the countries that have much higher levels of debt seem to have

lower inflation rates than the ones that are like leading the parade in inflation, like Brazil and Turkey. The irony is that the conservatives that are blaming the Trudeau government's deficits and debt is that their election platform themselves would have run up actually slightly higher deficits for the current year when it's this year that we're saying inflation is a problem. So that's bringing us now into, you know, what to do about the problem and to some of the more solutions here. Can you just explain firstly the kind of Econ 101 standard solutions that would normally be used in normal times to deal with inflation and if you think they'd work here? Angela, thank you for making it clear that we are talking about Econ 101 for normal times. This is anything but normal times.

We are talking about Econ 101 for normal times. This is anything but normal times. First of all, Econ 101 would say reduce inflation by raising interest rates. That's the job of the central bank. That's monetary policy. But there's a second shoe to fall in Econ 101, which is reduce deficits. So we have less price pressures in the system. And that's about less government, more market. But neither of these solutions is going to address the drivers, the current drivers of this inflation

right now. And both could easily make things worse. Okay, and why is that? Why can't those solutions work here? Well, let's start with the Bank of Canada, which would typically be charged with wrestling inflation to the ground. Canada, which would typically be charged with wrestling inflation to the ground. Look, interest rates are at historic lows. They're lower than even they were during the Great Depression of the 1930s. So the thing that most politicians are worried about is how low interest rates are driving up the price of housing and making it harder for young families to get into the housing market. 27 year old Jose of Greeley called me on Friday from his parents basement. He can't afford a home. He has a job, the same job

his mother had in fact, but while her family could afford a two acre lot and a nice property to raise the kids, he can't even afford a condo. But if you raise rates too soon, you're also challenging young homeowners that just took out mortgages. And more importantly, you're challenging businesses that have been struggling the last 20 some odd months to survive the pandemic. Look, we've got almost a million and a half jobless people and hundreds of thousands of people who are still working way fewer hours than prior to the pandemic. When you raise the interest rate, you make it harder for business to hire people, easier for them to lay people off and harder for people to get back enough hours to make ends meet. You're going to you're going to kill purchasing power by raising rates. So you're just slowing the pace of recovery and adding to the number of people thrown out of work.

And when it comes to less government, more market, look, the real takeaway from the global financial crisis is you can't cut your way to growth now. And that's what cutting deficits too fast would do. You would, again, undercut the pace of recovery right now, because markets just aren't strong enough to take over. Whether you're relying on exports or domestic economies, there's so much fragility in the system. And I want to talk now about the federal liberal government. What can they do to try to deal with this? Here's the rub. They cannot do the things we need without adding spending at a time when revenues aren't growing that rapidly. So what

they have done and what has led to the deficit in the first place is support purchasing power through EI and emergency response benefits and wage subsidies, for better or worse. They've also increased spending in the economy by starting to build more affordable housing and starting the process of offsetting the costs of access to good quality child care and expanding the amount of child care but that won't kick in for a while yet but that should address things like labor shortages there's also the point that we're seeing in bc with you know rail tracks and roads flooded out, like the BC government doesn't have a deep pocket for repairing that, the federal government could again, step in to help repair destroyed infrastructure, and perhaps help every jurisdiction deal with what seems to be the consequences of

more frequent and terrible climate events to build resilience. But whatever they do, the type of inflation we are dealing with is global and driven by global interdependencies, types of issues that are largely beyond the control of one single government. No government anywhere in the world is going to be able to snap their fingers and end the inflation we are seeing. Governments can spend things, though, on the things that we need to get done to increase growth and resilience. And if they decide to cut too fast, they'll actually reduce economic growth and resilience. Armin, thank you so much for this. I really appreciate you taking us through this. Thank you, Angela, for reaching out.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because

money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. So now, the CBC's Aaron Wary is going to give us a look at how this is all playing out in Parliament and whether it could cause problems for the Liberals. Hi, Aaron. Hey. So as we briefly noted already in this episode, the Conservative Party has made the inflation issue a really key focus since Parliament returned a couple weeks ago. And I'm wondering if you could just sort of lay this out for us a bit more, what they've been doing to hammer this idea home. Right. So ever since Parliament came back, the Conservatives have really focused on this issue basically every day in question period. In Canada, homes aren't getting built, which is

making inflation worse. And the Liberal government's out-of-control spending is also making inflation worse. Mr. Speaker, when will he realize that more dollars chasing fewer goods means higher prices and that the more he spends, the higher the cost? The right honorable prime minister. And they have, you know, leaned into this this hashtag and this phrase they like to use, calling it just inflation, playing on the fact that, of course, the prime minister's first name is Justin and also the fact that you're not supposed to say proper names in the House of Commons. So this is their way of sort of mocking that, too. They've really gone at the Liberals to explain what they're going to do about it and to blame the government for basically creating the problem,

at least in the Conservatives' account, by running these deficits over the last few years. Edwin, why do you think the Conservatives have decided to focus so much on this issue in particular? So I think it's right in their wheelhouse in that, you know, first of all, it's a pocketbook issue. It's something that's very tangible for people. You know, if you're going to see it every time you go out to buy something, you know, it's very unlike a lot of other issues in federal politics. It's direct and it's immediate and people feel it. And then you for the other the other part of it for the conservatives is that they can then connect it to this idea that, well, we have inflation and that's being caused by government spending. And so we are the party of fiscal discipline and balancing the budget.

And the liberals are the party of spending too freely and being irresponsible. And, you know, this is another example of the liberals free spending ways causing problems, you know, so it works for the conservatives on a couple of levels. And they obviously see it as a pretty potent political attack. And I want to talk about this conservative MP, Pierre Poiliev. Not all of our listeners will be familiar with him. He's their finance critic. Watcher. What feels significant to you about the fact that it's Poiliev who's the one who's really leading the charge on this message about inflation? Why is it then that Canadian consumers are paying higher rates of inflation than Saudi Arabia, Switzerland, Singapore, India, China, Japan,

Germany, Italy, France, the UK, the Eurozone. In fact, every country except the money printing mammoth south of the border has lower inflation than us. Why doesn't he take responsibility? Yeah, he's an interesting figure in his own right. He was the finance critic on the conservative side for a while after Aaron O'Toole became leader. But then a few months before this year's election, Pierre Polyev was switched out to a different position. And Aaron O'Toole's side kind of said, oh, it's not a demotion. We're putting him in another job that we think is just as important. But it also would have made sense if what they were looking to do was to present a more moderate,

less threatening, kind of less edgy image of themselves going into that election, because Pierre Palliot is a bit more elbows up, a bit more abrasive, a bit more hard line in terms of sort of his views of things in terms of fiscal policy. And Aaron O'Toole ran in the last election on kind of a very moderate image and platform. And then coming out of the election, you know, Aaron O'Toole is, you know, kind of weakened by that election result. And Pierre Paglia finds himself back in the finance critic portfolio. And he had been building this very online and following as this deficit hawk and warning that Bank of Canada policy was going to drive inflation and that this was dangerous. And he has really kind of embraced that now as this

conservative spokesman. And so he's taking a much harder line on fiscal policy. And it opens the question of whether Aaron O'Toole and the conservatives are ready to pivot to a kind of, you know, a more hard line fiscal policy, because as Armin said in the last election, they ran on a platform that promised larger deficits in the short term and then basically followed the same fiscal track going forward. So his emergence of this issue, you know, it will be interesting to see whether that kind of tells us something about the direction of the party. Can you talk about how the Liberals are responding to these, quote unquote, just inflation charges? And I know that there's some sparring between Poiliev and Finance Minister Chrysia Freeland. So maybe can you lay out some of that drama for us? Yeah. So the Liberals obviously, as Armin says, don't have a lot of easy answers here. They can't

snap their fingers and make inflation go away. But they can at least try to defend themselves to some extent in the House. So, you know, Pierre Polyev as the finance critic is obviously matched up against the finance minister, and that's Chrystia Freeland. And I think it's fair to say Chrystia Freeland isn't or hasn't up until now been really known as a political fighter or a combatant in question period. So I'd say for the first little bit, it looked like the advantage here was going to go to Pierre Polyev. But Chrystia Freeland has, I think, sort of changed her approach a bit in question period and is being much more aggressive in defending the government's record in pointing out the global nature of this problem. I know that Canadians understand that inflation is a global phenomenon. And here are some numbers to back that up. Inflation in Canada in October was 4.7 percent. In the United States, it was 6.2%.

In Mexico, 6.2%. In New Zealand, 4.9%. In criticizing the conservative record or the conservative platform on this issue. We know we did the right thing. Let me quote the governor and urge the conservatives to read a book or two and understand. And in trying to sort of at least give as good as she's getting from Pierre Paglia, the problem is that, you know, yes, it is a global problem. And it's easy enough for people like us to acknowledge that the government doesn't have a lot of easy solutions. But in the mix of the political fray, it's not great to not be able to

say something about what you're going to do about the issue. And the Liberals, I think, are still struggling to figure out their message at this point. They haven't yet kind of come around to the idea that they need to show some concern about this and they need to show some response to it. So how vulnerable could the Liberals be here? Could, I mean, could the conservative strategy actually harm them at this point? I mean, I think they are vulnerable in the short term. I think a lot depends on how long term this issue is. You know, if two months or four months or six months or even, you know, a little bit longer than that goes by and inflation sort of dissipates and it goes away, then this could be

like other issues. You know, you think back to, you know, not that long ago, the liberals were accused of failing miserably on vaccination. And then a lot of vaccines showed up and those criticisms went away. But if it persists, any issue, any economic issue, any cost of living issue that leads to angry, grumpy voters is going to make trouble for the incumbent government and is going to make it harder for them to make their case. The other piece here is the Conservatives have tried to make it a bit of a reflection on the Prime Minister's own sort of empathy and his ability to understand issues. You know, they've challenged him to say what the price of bacon is and what the price of

milk is. So my question for the Prime Minister is simple. When is the last time he's gone and filled up his tank with gas? When has he gone to a grocery store? When has he gone to a hardware store? Does he know what a loaf of bread costs now or maybe a can of beans or a package of bacon? Thank you. The right honourable prime minister. To try to make the idea that he's out of touch. So there's lots of ways that this could be a problem for the Liberals. And so that's where they probably have to figure out a way to seem responsive, to seem understanding, even if there's no sort of magic policy they can implement tomorrow that will make the problem go away.

And we've already noted that the Liberal government, especially during the pandemic, has really focused on a big government, big spending kind of approach with a lot of massive social programs. And I'm wondering if this messaging from the Conservatives does seem like it's landing more and more with voters. Could that be any kind of threat to this government's big social spending agenda? Could that be any kind of threat to this government's big social spending agenda? Look, if you go back to the budget Christa Freeland tabled earlier this year, I do think it is fair to say that it was a pivot away from the sort of 1990s consensus that the two most important things for the government to do were to balance the budget and cut taxes. You know, she was, especially with adding something like childcare onto the table,

broadening horizons a bit about what government can do and what government should do. And I think inflation has the potential to be something that the conservatives can use to try to wrestle that argument back a bit and say, oh, you know, we had this consensus that governments should balance their budgets and cut taxes. And now the liberals have deviated from that consensus. And look, this is what happens. You get inflation. And so I do I do think it is an attempt by the conservatives to sort of wrestle the argument back. I don't know that it will be as easy as it was in previous generations to wrestle the argument back. But it is, you know, if inflation persists and the public has any sense or comes away with any sense that this is because of government spending or government policy, then yeah,

I think it is at least a challenge for the progressive side of the argument to not only say, look, government spending hasn't caused this problem, but also that cutting spending isn't going to be a solution and that, you know, they aren't courting disaster. The flip side of that, though, is that I don't know how much the Conservatives are really in a position to argue for strict fiscal discipline. You know, they certainly didn't make that argument in the last election. The only sort of major expense they were ready to cut was to walk away from the child care deals. And if or when, probably more likely when, Ontario signs on, then every province will be committed to child care and the federal plan. And I don't know that any conservative wants to run against that. And you have to explain what you'd cut. And that's never a pleasant argument to make,

short of there being a crisis that it feels like the public absolutely wants to see cuts. You know, it will feel tough to make to argue exactly which cuts you want to make. And so, you know, yes, inflation will make could make the liberal argument harder in the long term. But I don't think it's a slam dunk for the conservatives that if they plan on running in the next election on, you know, very quickly balancing the budget, that the public is necessarily going to embrace that readily. Aaron, thank you so much for taking us through this story. Really appreciate it. And it's been a pleasure talking to you. Anytime. And that's all for today. Thanks for listening to FrontBurner.

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