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 7, 2023
Statistics Canada recently published three short papers that provide a mishmash of data and analysis about the inflation we have experienced since 2020. They claim to pinpoint the impact on prices of imports, wages, profit margins and other non-labour costs. But the results depend on highly questionable assumptions, sometimes are contradictory, and in the end add little to our understanding of inflation’s origins.
Start with “Import prices and inflation in Canada.” This paper suggests import prices rose steadily to contribute about half the increase in GDP prices in 2022. So the government is partly right: some inflation was imported. But not all imports are created equal and their prices move in different rhythms. Imports used in exports are mostly parts needed to manufacture autos, machinery and equipment. They are distinct from imports for domestic consumption, which include a wide array of consumer goods, such as clothing and electronics. After 2019, prices for consumer goods rose 14.4 per cent. But auto prices rose only 5.7 per cent and the prices of electrical equipment actually fell slightly. So inflation pressures from the foreign sector didn’t have a uniform impact.
The study also assumes a full pass-through from import prices to output prices. But businesses’ ability to pass price increases along depends on the state of the economy and how competitive markets are. There was no pass-through from the plunging loonie to higher import prices in the first half of 2020 because demand cratered as the pandemic began. Even assuming full pass-through when the recovery was still fragile in 2021 is questionable, but by 2022 demand was so robust one of the companion studies found output prices actually rose more than import prices. With pass-through varying in this way, it’s just not possible to have great confidence about import prices’ impact on inflation.
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