This article originally appeared in the Financial Post. Below is an excerpt from the article, which can be read in full here.
By Philip Cross, July 14, 2022
The only fitting reaction to the Bank of Canada’s surprise full percentage point increase in its target interest rate Wednesday is, “Well, it’s about time!” The bank’s statement accompanying its decision suggests it has now finally processed what many observers have been saying for months now: that overall demand in the economy is outstripping overall supply and as a result inflation is in danger of getting out of control, if it isn’t already.
No doubt people on the left will go ballistic, warning about the danger that high interest rates will spark a recession — as if recession were the worst thing that could happen to an economy, even worse than continuing 7.7 per cent inflation or higher. They will argue that we need some other way to get inflation down. But both the economic theory and the historical evidence are clear: there is no other way to get inflation down. Inflation is a monetary problem that can only be contained by monetary and fiscal restraint.
On the left, however, the belief persists that inflation reflects a combination of supply shocks and predatory corporate behaviour that for some unexplained reason only surfaced during the pandemic. Whatever its causes, it must never be tackled with higher interest rates since that would end the stimulus party and hurt the relatively small number of individuals who would become unemployed.
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