By Philip Cross, June 17, 2022
This month central banks have signalled to varying degrees their awareness of both the costs of higher inflation and the risk it is becoming embedded. The European Central Bank said it intends to raise interest rates in July for the first time in 11 years, although it is a mystery why eight per cent inflation is not enough for it to act immediately. This week’s 75-basis point rate hike by the U.S. Federal Reserve Board, the largest since 1994, demonstrates its commitment to its two per cent inflation target. Here in Canada, deputy governor Paul Beaudry recently signalled a clear tightening of the Bank of Canada’s monetary policy to correct for its admitted “inflation forecasting errors.” This was followed by a half-point hike to rates.
As the damage from inflation mounts the need to tighten financial conditions is clearer and clearer. The Bank of Canada estimates inflation of five per cent costs the average Canadian $2,000 a year, so the actual rate of 6.8 per cent (and rising) is likely costing every one of us over $3,000 a year. Businesses are also feeling the pinch of higher costs. Business confidence fell for a third straight quarter, as 46 per cent of firms reported rising labour costs are affecting their investment plans.
Fighting inflation is always painful. Slower growth or even recession means some Canadians — though not a large percentage — lose their jobs. Weaning financial markets off an addiction to near-zero interest rates causes losses, as seen in stock and bond markets this year. But the alternative of higher inflation affects many more people. A recent Statistics Canada survey found that three-quarters of Canadians said higher prices make it hard for them to meet their day-to-day expenses.