OTTAWA, ON – Ottawa’s out-of-control spending during the COVID-19 pandemic bears primary responsibility for the significant rise in inflation, according to a recent report from the C.D. Howe Institute. The study, most recently covered by the National Post, suggests that a substantial influx of government (read: taxpayer) funds into the economy acted as the main driver of soaring prices, not interest rates.
The report, authored by economists David Andolfatto and Fernando Martin, attributes the inflationary pressures to the Liberal’s unfunded spending spree, which they likened to “helicopter drops” of money directly into the private sector. In 2020 alone, an estimated 20.7 million Canadians – out of an adult population of 30.3 million – received income from federal pandemic relief programs. These initiatives, designed to support individuals and businesses through the crisis, cost $270 billion in 2020 and have accumulated a total cost of $360 billion since their inception.
While acknowledging the success of these programs in providing crucial relief and propping up the economy during an unprecedented crisis, the C.D. Howe Institute argues that injecting such a considerable amount of “nominal wealth” into an economy with relatively low unemployment levels ultimately triggered an inflation burst and led to permanently higher prices. “Whether this wealth takes the form of new money or new debt is largely irrelevant,” the report says.
Benjamin Tal, Deputy Chief Economist of CIBC World Markets, agrees that loose fiscal and monetary policies contributed to the pandemic-era price hikes, though he also points to the central bank’s low interest rates as a contributing factor. “There is no question about the fact that very accommodating fiscal and monetary policies were behind the acceleration in inflation,” Tal affirmed.
According to the Consumer Price Index (CPI), Canada experienced an 11.4 per cent increase in prices between January 2020 and December 2022. While the pandemic’s initial impact on Canada was felt in early 2020, inflation did not spike immediately. Prices maintained relatively normal rates until May 2021, eventually peaking in June 2022 at 8.1 per cent – the highest rate seen in nearly four decades.
Andolfatto and Martin, while critical of the government’s spending, offer a more nuanced assessment of the Bank of Canada’s role. They agree with the Bank of Canada’s own self-assessment, in that the central bank could be faulted for its delay in raising interest rates to curb inflation. The economists also suggest the Bank of Canada could be criticized for its communication regarding how it intended to achieve its inflation targets. However, they ultimately conclude that there was little the central bank could have done to curb the price spikes given the circumstances.
The report recognizes the pandemic as a unique situation characterized by a combination of inflationary and deflationary pressures. Price increases in some cases were partly driven by tightened supply of various products due to supply-side issues. Transportation costs escalated because of shipping delays and congestion at numerous ports. Furthermore, shortages of essential raw materials, such as lumber and metals, also played a role in contributing to inflation.
At the same time, there was a surge in demand for specific goods and services, including real estate, furniture, exercise equipment, and home entertainment gadgets. This increased demand was partly fueled by consumers having more disposable incomes. Many individuals saved money by working from home and being unable to participate in usual outings or travel, while others received wage increases or worked extended hours, particularly those in healthcare. Income derived from government support programs further amplified this demand. The combined effect of reduced supply and rising demand inevitably contributed to increased costs.
Certain Goods Impacted More Than Others
Among the products most significantly impacted by inflation was gasoline, which saw a price increase of over 50 per cent during the two-year period. Food and transportation costs jumped between 15 and 20 per cent, while appliances and rent experienced increases of 10 to 15 per cent.
Finance Canada, the federal department responsible for fiscal policy, did not immediately provide a comment on the report’s findings.
Even as the pandemic has receded, prices have not reverted to pre-pandemic levels for a variety of reasons. Katherine Judge, Senior Economist at CIBC Capital Markets, noted that inflation has persisted due to pent-up consumer demand and excess savings. She also highlighted long-term shifts, such as an increase in remote work and the retirement of many baby boomers, as contributing factors. In recent months, Judge added via email, import tariffs imposed by Ottawa amid ongoing trade disputes have also contributed to higher prices.
Earlier this week, Statistics Canada reported that Canada’s inflation rate accelerated to 1.9 per cent in June, up from 1.7 per cent in the previous month.
