Political rhetoric on inflation is out of touch with reality, experts say

Prices in Canada are rising — and they're rising fast.

Statistics Canada released its measure of inflation, the Consumer Price Index (CPI), earlier this week. It reported that prices are now 6.7 per cent higher than they were this time last year.

It's the largest spike in the CPI since January of 1991, the year the government introduced the GST.

"Prices increased against the backdrop of sustained price pressure in Canadian housing markets, substantial supply constraints and geopolitical conflict, which has affected energy, commodity and agriculture markets," StatsCan said.

The Bank of Canada has raised its benchmark interest rate by half a point to 1 per cent, citing the need to curb inflation. Bank of Canada Governor Tiff Macklem hasn't ruled out further increases.

The rising cost of living has caught the attention of many prominent politicians. But is what they're saying about it all true?

Is the federal government causing inflation?

Conservative leadership candidate Pierre Poilievre, a former finance critic who is widely considered to be the front-runner in the race, has made inflation a central part of his campaign.

Poilievre claims the Trudeau government's approach to spending and taxation is a major force driving inflation.

"Trudeau's big spending, deficits and taxes have driven up inflation, which in turn is now driving up interest rates," Poilievre said in a recent news release.

"I would reverse JustinFlation with common sense policy, including: axing the carbon tax, phasing out inflationary deficits by ending wasteful spending and cancelling new promises and removing the gatekeepers to make more of what cash buys — energy, food and housing."

Is Poilievre right? Is government fiscal policy driving up prices?

Jean-Paul Lam, an economics professor at the University of Waterloo and a former assistant chief economist at the Bank of Canada, said government spending is one of many factors pushing prices up — but it's a relatively modest one.

Economic support programs related to the pandemic are a significant reason the federal deficit is so large now; the deficit was projected at $53 billion in the latest budget. But that doesn't come close to explaining the rate of inflation we're seeing now, he added.

"This is a minor factor ... I don't think the fiscal position of the government, although it has deteriorated significantly over the last two years, is a key factor to inflation right now," he said.

Trevor Tombe, a professor of economics at the University of Calgary and a research fellow at the university's School of Public Policy, said Poilievre is correct in the sense that government spending and taxation can be a factor in inflation.

"Fiscal policy can indeed matter for price levels if central banks don't respond to that spending," he said.

But the federal government's decisions on spending and taxation don't have much of a relationship to the other, more important forces pushing prices up, he said.

"It really doesn't matter what Canada's government spends. Oil prices are going to rise and fall due to much larger global forces that are beyond our control," he said.

"And even real estate prices being as high as they are, this is not a uniquely Canadian phenomenon. And we're seeing home costs rising by roughly the same amount throughout the developed world that we're seeing here in Canada."

What about those big corporate profits?

NDP Leader Jagmeet Singh took to Instagram Wednesday to talk about the rising cost of living.

He argued that inflation is being driven not by supply issues, nor by government stimulus programs, but by big companies looking to boost profits.

"It's because of greed," Singh said. "When the cost of things goes up, it hurts some people, but it benefits those at the very top."

There's some truth to the picture Singh paints, Lam said.

The pandemic has wiped out many smaller businesses, which means some bigger firms are facing less competition now. Businesses often raise prices when this happens, he said.

Some businesses also have faced increasing costs for raw materials and supplies, he said, and have passed those costs onto customers by raising prices.

But that doesn't mean Singh's reasoning is sound, he added.

"I think it's a bit too simplistic in terms of [an] explanation of inflation," Lam said. Pricing decisions being made by corporations now are largely responses to inflationary pressures coming from other factors, such as global supply constraints, he said.

Tombe agreed.

"This is, again, an example of political language oversimplifying complex issues like inflation," he said.

Tombe points to the auto industry, where a severe shortage of car parts has gutted supply and pushed up prices — but not necessarily profits.

"And so there's a lot of factors here that have nothing to do with greed, with market power, with corporate profits," Tombe said.

Lam and Tombe both said, however, that Singh has put his finger on an important point: inflation doesn't affect everyone the same way.

The well-off don't necessarily benefit from inflation — prices are rising for everyone, after all, including the rich — but the poor have a harder time dealing with more expensive essential goods. The price of groceries, for example, has increased 8.7 per cent compared to last year, according to the CPI.

And those with certain types of assets may benefit from inflation if the value of what they own goes up. Real estate is a good example of this, Lam said.

How about the Bank of Canada?

The bad news for people in financially precarious positions may not end with rising prices, Lam said.

Canada's central bank is likely to continue raising interest rates to address inflation, he said. That means debt loads will be more expensive to service.

"So you can see that the young people who've just got in the housing market, the people who have a lot of debt and coping with high mortgage debt, they are the one who are going to be hurt disproportionately compared to the people who have a massive amount of wealth," Lam said.

The Bank of Canada has also been in Poilievre's crosshairs. He has criticized its approach to monetary policy and accused it of driving inflation.

Tombe said that while Canada's central bank hasn't always performed flawlessly, it would be unfair to expect perfection given the unprecedented disruptions the global economy has faced in recent years.

"While I think, in retrospect, central banks ought to have been tightening earlier, I don't think that means they made a mistake given what they knew at the time, and given what was reasonable and all of the uncertainties involved," he said.

Lam's assessment of the bank's response to inflation is less forgiving.

"I think they've been very slow to react to inflation," he said.

"Their main message was, 'Don't worry, it's transitory. It's going to go back to two per cent, etc.' They, I think, made a mistake by sticking to that message for too long."

So what is driving inflation?

If the federal government, big business and the central bank aren't the primary culprits, what is causing prices to spike?

The answer to that question may be frustrating for the government — and for those seeking to lead it, like Poilievre and Singh. This current wave of inflation is mostly the result of global supply chain issues and geopolitical tensions — things over which Canada has little influence.

The Russia-Ukraine war has affected energy and food prices. Supply chain issues — especially in China, thanks to pandemic restrictions — are major factors, Lam said.

Demand for goods and services is also higher right now than many analysts predicted it would be earlier in the pandemic, he added.

"I think the bad news for Canadians is probably [inflation] is going to go higher in the months to come," he said.

Lam said raising interest rates is the most effective way of bringing inflation down, but it will be a difficult balance for the Bank of Canada to strike.

Tombe agreed with Lam's assessment of Canada's vulnerability. As a small trading nation, he said, Canada is exposed to global supply and geopolitical shocks but has few tools to fight back.

The situation calls for a cautious approach, he added.

"We don't want to overreact to what are potentially temporary factors," he said.

"If energy prices don't continue to rise, if home prices don't continue to rise at the rapid pace that we've seen, then inflation should get back closer to what we consider normal later this year and early next."