This article originally appeared in the Financial Post. Below is an excerpt from the article.
By Jack Mintz, June 7, 2024
Governments and central banks are clearly winning the war against inflation, which is falling in most countries. Yet the high cost of living dominates polls in many places and politicians are taking heat for it from their electorates. Ask India’s Prime Minister Narendra Modi, who, despite winning re-election, lost his parliamentary majority as voters turned against his government over bread-and-butter issues. Or check with U.S. President Joe Biden and the U.K.’s hapless Prime Minister Rishi Sunak, both seeking re-election and both mired in poor polling as voters are angry over inflation and their handling of the economy.
As of April, year-over-year inflation had fallen to 2.9 per cent in the G7 countries. That sounds good compared with its peak of 7.1 per cent in 2022, right? Maybe not. The public is concerned about the cumulative change in prices since the pandemic, not just the latest inflation rate. People are not yet ready to credit governments for success in reducing inflation.
Call it the Great Disconnect between policy-makers and voters. When central bankers make a decision to increase or cut interest rates, they quite correctly focus on current inflationary trends. Because inflation has fallen and GDP growth is slowing, the Bank of Canada cut the bank policy rate by 0.25 percentage points on Wednesday, the first cut in four years and ample reason to cheer. On the other hand, interest rates are still much higher than five years ago.
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