Economic experts warn the early warnings of rising inflation have appeared, threatening a greater burden on indebted Canadians and federal and provincial governments..Thanks to new debts from the provinces and federal government, the Bank of Canada tripled its assets in 2020. This led to a 30 per cent increase in the money supply, which is much higher than the typical 7 per cent annual increase..In an interview with the Western Standard, Macdonald Laurier Institute Senior Fellow Philip Cross warned the higher money supply could lead to higher inflation, followed by higher interest and mortgage rates..“We Canadians are holding a tremendous amount of debt, especially government, but household debt is very high, too, with all this housing we’re buying. So if interest rates start rising, that’s going to be burdensome for a lot of people who are taking on a lot of debt during this crisis.”.The deficit spending of the 2008 financial crisis did not result in inflation, partly because the Bank of Canada wound down its holdings as quickly as it could. This past year, the Bank of Canada has bought at least $4 billion of federal debt every week and there’s no end in sight..Some early signs of inflation are already evident. The price of gasoline has risen 30 cents per litre since December, and the price of lumber and some commodities have also spiked. The main reason inflation has not manifested more broadly is that pandemic restrictions have prevented spending.. Screen-Shot-2021-03-30-at-11.35.42-AM .“We’re conducting a huge experiment now. What’s going to happen? I mean, Canadians are sitting on literally hundreds of billions of dollars of savings. What are they going to do with that? I don’t know. Nobody knows. We’ve never been here before. We’ve never been in a pandemic,” Cross said.. “It’s almost guaranteed that inflation is going to go up to at least 3 per cent, probably a little more, probably four, four and a half, just for technical reasons.”.Steve Ambler, with C.D. Howe Institute as holder of the David Dodge Chair in monetary policy as well as a retired professor, told the Western Standard, he also sees early signs of inflation..“Real estate prices are one area that’s really, really picking up very quickly. In Montreal now you have all this evidence. There was a house not too far from where we’re living that went on the market, and had about 12 offers on it within 24 hours and sold a day later at $100,000 over asking price,” Ambler said..“I think we should be prepared to see inflation a bit above 2 per cent for a while,” Ambler said..“If I had to predict, it’s going to happen probably before 2023 – not before the end of 2021, but maybe sometime in 2022.”.Ambler believes when inflation takes hold, the Bank of Canada will face “a tough balancing act” deciding how much to let interest rates climb..“They’re going to receive some implicit pressure – probably not explicit, but you never know – from the federal government to keep rates down to bear the costs of servicing payments on the federal government debt don’t explode.”.Inflation in the post-pandemic economy won’t be evenly spread, Ambler said..“Certain sectors that are going to be looking at capacity constraints and excess demand move very quickly. And it’s not gonna be sort of inflation in the classic sense of an increase in prices across the board. But I think some sectors are going to see spikes in prices,” he said..William Robson, president and C.E.O. of the C.D. Howe Institute, told the Western Standard he might pay closer attention to the Bank of Canada’s monetary aggregates than the bank itself..“When there was a very odd thing happening with the growth rates, I asked one of the members of governing council [at the Bank of Canada] what he thought might be behind it, and he was surprised to hear of it at all. So they’ve got it in the shop window but it’s not something that they’re paying a whole lot of attention to,” Robson said..Certain figures have caught Robson’s eye..“The spread between ordinary and real return bonds are an indicator of inflation expectations,” Robson said..“A year ago, it was about 0.8. Now it’s about 1.6.”.A comprehensive measure of the money supply, M2, is rising rapidly..“Even M2 is growing very, very fast, by any standard, like double digit growth rates,” Robson said..Robson just hopes the federal government will maintain a 2 per cent inflation target as it renews its five-year agreement with the Bank of Canada later this year..“I’m nervous as is. If I start to hear anybody on the elected side talking about the advantages of having a more flexible or higher inflation target, then my nervousness escalates to sleepless nights,” Robson said..Lee Harding is a Western Standard contributor based in Saskatchewan
Economic experts warn the early warnings of rising inflation have appeared, threatening a greater burden on indebted Canadians and federal and provincial governments..Thanks to new debts from the provinces and federal government, the Bank of Canada tripled its assets in 2020. This led to a 30 per cent increase in the money supply, which is much higher than the typical 7 per cent annual increase..In an interview with the Western Standard, Macdonald Laurier Institute Senior Fellow Philip Cross warned the higher money supply could lead to higher inflation, followed by higher interest and mortgage rates..“We Canadians are holding a tremendous amount of debt, especially government, but household debt is very high, too, with all this housing we’re buying. So if interest rates start rising, that’s going to be burdensome for a lot of people who are taking on a lot of debt during this crisis.”.The deficit spending of the 2008 financial crisis did not result in inflation, partly because the Bank of Canada wound down its holdings as quickly as it could. This past year, the Bank of Canada has bought at least $4 billion of federal debt every week and there’s no end in sight..Some early signs of inflation are already evident. The price of gasoline has risen 30 cents per litre since December, and the price of lumber and some commodities have also spiked. The main reason inflation has not manifested more broadly is that pandemic restrictions have prevented spending.. Screen-Shot-2021-03-30-at-11.35.42-AM .“We’re conducting a huge experiment now. What’s going to happen? I mean, Canadians are sitting on literally hundreds of billions of dollars of savings. What are they going to do with that? I don’t know. Nobody knows. We’ve never been here before. We’ve never been in a pandemic,” Cross said.. “It’s almost guaranteed that inflation is going to go up to at least 3 per cent, probably a little more, probably four, four and a half, just for technical reasons.”.Steve Ambler, with C.D. Howe Institute as holder of the David Dodge Chair in monetary policy as well as a retired professor, told the Western Standard, he also sees early signs of inflation..“Real estate prices are one area that’s really, really picking up very quickly. In Montreal now you have all this evidence. There was a house not too far from where we’re living that went on the market, and had about 12 offers on it within 24 hours and sold a day later at $100,000 over asking price,” Ambler said..“I think we should be prepared to see inflation a bit above 2 per cent for a while,” Ambler said..“If I had to predict, it’s going to happen probably before 2023 – not before the end of 2021, but maybe sometime in 2022.”.Ambler believes when inflation takes hold, the Bank of Canada will face “a tough balancing act” deciding how much to let interest rates climb..“They’re going to receive some implicit pressure – probably not explicit, but you never know – from the federal government to keep rates down to bear the costs of servicing payments on the federal government debt don’t explode.”.Inflation in the post-pandemic economy won’t be evenly spread, Ambler said..“Certain sectors that are going to be looking at capacity constraints and excess demand move very quickly. And it’s not gonna be sort of inflation in the classic sense of an increase in prices across the board. But I think some sectors are going to see spikes in prices,” he said..William Robson, president and C.E.O. of the C.D. Howe Institute, told the Western Standard he might pay closer attention to the Bank of Canada’s monetary aggregates than the bank itself..“When there was a very odd thing happening with the growth rates, I asked one of the members of governing council [at the Bank of Canada] what he thought might be behind it, and he was surprised to hear of it at all. So they’ve got it in the shop window but it’s not something that they’re paying a whole lot of attention to,” Robson said..Certain figures have caught Robson’s eye..“The spread between ordinary and real return bonds are an indicator of inflation expectations,” Robson said..“A year ago, it was about 0.8. Now it’s about 1.6.”.A comprehensive measure of the money supply, M2, is rising rapidly..“Even M2 is growing very, very fast, by any standard, like double digit growth rates,” Robson said..Robson just hopes the federal government will maintain a 2 per cent inflation target as it renews its five-year agreement with the Bank of Canada later this year..“I’m nervous as is. If I start to hear anybody on the elected side talking about the advantages of having a more flexible or higher inflation target, then my nervousness escalates to sleepless nights,” Robson said..Lee Harding is a Western Standard contributor based in Saskatchewan