Inflation Winners and Losers

By Forrester Sorensen, Staff Writer

After weathering the initial economic storm brought on by the Covid-19 pandemic, Canada and the U.S. must face a new beast that has surfaced for the first time in decades: inflation.

Inflation is defined by Investopedia as “the rate at which the value of a currency is falling and, consequently, the general level of prices for goods is rising.” In an economy, some inflation is acceptable as prices inevitably increase as resources become more scarce, and wages typically respond accordingly. The Bank of Canada (BoC) considers an annual inflation rate of 1-3% healthy. However, Canada’s inflation rate has been hovering around 5% for the last few months, the highest it has been in 18 years, and the U.S. just announced that its year-over-year inflation rate reached 7.0%, a level that has not been seen since 1982.

These historically high inflation rates are going to drive up the cost of everyday living for the average Canadian, and they are an indirect result of the Canadian Government’s initial economic response to Covid-19. At the beginning of the pandemic, in response to widespread lockdowns and the March 2020 market crash, the federal government spent over $81 billion on CERB and EI payments in an attempt to stimulate the economy and financially support the millions of Canadians who lost work due to the pandemic. The Bank of Canada also slashed interest rates to encourage greater borrowing and spending.

Meanwhile, with so many people stuck at home, the production and transportation of goods slowed, resulting in supply shortages for inputs such as computer chips in addition to a plethora of other supply chain issues.

This scarce supply of goods coupled with the increased potential for consumption and the disincentivization of work stemming from the Government’s and BoC’s stimulus package created the necessary economic conditions for the extreme price growth we have seen over the past year.

The increasing cost of living is an area of great concern for many Canadians. A study conducted by Nanos Research found that 87% of Canadians surveyed said that they are more worried about the rising costs of everyday goods than they are about rising interest rates and a higher cost of borrowing.

High inflation is worrisome for many people as it can disproportionately negatively affect those in lower socioeconomic positions. As Bloomberg Columnist Tyler Cowen puts it, “the poor hold a disproportionate share of their assets in pure cash, which has no potential for appreciation, and is hit hard in inflationary times.” 

Nonprofit and public sector employees are particularly susceptible to inflation as their wages are less responsive to market trends compared to the private sector. Often these workers must wait for legislators to approve a larger budget for their initiative or organization in order for their wages to increase. Even if these workers have a contract or agreement that includes a cost-of-living adjustment, the annual raises are typically in the range of 1-3% a year, designed to keep pace with normal inflation. Thus, when inflation is as high as it is now, one’s real wage and purchasing power suffers.

On the other hand, the upper echelon of earners – those who possess tangible assets such as real estate, are much better equipped to deal with inflation as it will increase the value of their asset, and will have a lesser impact on their proportionately smaller cash holdings.

The silver lining for lower and middle-class Canadians is that borrowers can be positively affected by inflation. This is because the real value of any outstanding debts is lowered. For example, if the inflation rate is 5%, and your wages increase by 5%, then any debt you hold, though nominally the same, loses 5% of its value.
According to almost all economists surveyed by Reuters, the Bank of Canada is expected to raise interest rates by the end of Q3 2022 in an attempt to prevent runaway inflation and skyrocketing prices. America’s equivalent to the BoC, the Federal Reserve, has begun to taper asset purchases and may start to reduce its balance sheet in the near future, a reversal of the quantitative easing exhibited at the onset of the pandemic. Should Canada continue to grapple with rising inflation, further contractionary measures like those put in place by the U.S. may need to be taken. In a way, it is ironic that we are now being forced to cool down our economy in response to a virus that at one point almost caused the world’s economic systems to stagnate.

Photo by Jp Valery on Unsplash

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