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Bank of Canada

The Bank of Canada's Misguided War on Inflation

Strategic Insights

— 1 min read

The Bank of Canada's Monetary Policy Report suggests that the bank's tight monetary policy has worked to reduce price pressures in the Canadian economy. However, the evidence shows that price stability was not restored by the bank's interest rate hikes, but rather by the decline of factors that sparked inflation, such as temporary commodity-price hikes and pandemic-induced supply-chain bottlenecks. Meanwhile, the bank's interest rate hikes have led to a decline in employment, with unemployment rising from 4.9% in June 2022 to 6.5% last month, affecting over 400,000 workers.

Key Takeaways:

  • The Bank of Canada's interest rate hikes did not restore price stability, but rather coincided with the decline of factors that sparked inflation.
  • Inflation started to fall when the bank's key rate was only 1.5%, before it was raised to 5% a year later.
  • The bank's declared war on inflation actually implied an undeclared war on workers, with over 400,000 workers affected by rising unemployment.
  • Real wages have actually risen, with average real wages being higher than when inflation started to surge in early 2021.
  • The bank's positive real rate of interest (2.65% last month, and 1.7% when the policy rate was raised to 5% in July 2023) was not enough to force workers to accept slashed wages.

Statistics:

  • Inflation peaked at 8.1% in June 2022, before declining to 1.8% in the first nine months of 2024.
  • Unemployment rose from 4.9% in June 2022 to 6.5% last month, affecting over 400,000 workers.
  • Average real wages are higher than when inflation started to surge in early 2021, and increased by 1.5% in the first nine months of 2024.
  • Nominal wages have risen 3.3% in 2024, while prices have gone up only 1.8%, resulting in a 1.5% increase in real wages.
  • The real rate of interest was positive (2.65% last month, and 1.7% when the policy rate was raised to 5% in July 2023) but not enough to cause a recession deep enough to make workers accept a decrease in real wages.

Sources:

  • "Bank of Canada Monetary Policy Report" released on Wednesday.
  • Gustavo Indart's previous column.
  • U.S. economist James K. Galbraith's statement "Causes must precede effects. A cause that has not happened cannot be credited with an effect that already has."

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