Annual inflation hit 8.1 per cent in June, according to Statistics Canada’s consumer price index report released Wednesday. The Bank of Montreal (BMO) said in its updated inflation forecast earlier this week that it expects inflation will average 8.3 per cent across the third quarter of the year.
The higher the temperature rises on Canada’s inflation thermometer, the more Canadians of a certain age flash back to the 1970s and 80s, when annual inflation hit 12.5 per cent in 1981.
Back then, the Bank of Canada was forced to raise its benchmark interest rate to 21 per cent to get prices back under control, triggering the deepest economic contraction since the Great Depression.
Experts tell Global News there are some striking similarities between today’s inflation episode and the price pressures of 40 years ago — as well as a few key differentiators that could mean the difference between hitting a recession or achieving the “soft landing” the central bank is after.
James Orlando, senior economist with TD Bank, first started tracking the similarities between today’s inflation period and the highs of the previous generation back in April.
Then, he noted that the causes of inflation today — surging food, fuel and shelter prices — were the same ones driving Canadian prices higher over two distinct periods, one in the early 1970s and one later in the decade, stretching into the 1980s.
“Current inflation is very much just like what happened back then,” he tells Global News.
For instance, many economists point to Russia’s invasion of Ukraine and the spillover effects on oil and food supplies as a primary source of global inflation today.
In the 70s, the Yom Kippur war, followed a few years later by the Iranian Revolution and the Iran-Iraq War, also put immense pressure on the prices of oil.
Meat prices, meanwhile, skyrocketed 70 per cent in 1978, according to Orlando’s analysis, leading to higher costs in the deli aisle that would feel familiar to many Canadian households looking at their grocery bills today.
Orlando wrote back in April that while today’s price hikes might not be at the same magnitude as the 70s and 80s, it might feel just as significant. When inflation hits the staples we buy regularly in the grocery store, it elicits a more intense, emotional reaction from consumers, he explained.
But while prices were high, Canadians also were spending heavily through much of the 70s thanks to rapidly rising wages and low interest rates.
Ian Lee, associate professor in the Sprott School of Business, remembers working through that inflationary period at BMO, handling mortgages for the bank in 1980.
He says in the 70s, it made sense to borrow rather than invest and buy later, because interest rates were low and tomorrow’s prices were expected to outpace any returns on savings and investments.
“Saving didn’t make any sense at all. So it created a real spend, spend, spend, borrow, borrow, borrow culture,” he tells Global News.
Lee said that many Canadians — himself included — put their money into homes. A run-up on housing prices as Canadians rushed into the market only fuelled inflation further.
Shelter has been a primary driver for today’s inflation episode as well, with rents now surging at the same time as rising interest rates make mortgages more expensive to carry.
Lee says one of the most important differences between today’s inflation and that of the 70s is the tightness of the labour market.
The 1970s and 80s saw stagflation materialize — slowing economic growth and high unemployment with prices surging nonetheless.
Today’s unemployment rate sits at a record low of 4.9 per cent, on the other hand.
Macklem has pointed to the strong labour force readings as proof that the economy can take higher rate hikes, even as some economists warn layoffs will follow suit if the bank is too aggressive.
Indeed, when the Bank of Canada had to raise its policy rate above the 20-per-cent mark in the 80s, following the U.S. Federal Reserve into the “war on inflation,” the economic pain was intense: the unemployment rate rose to 12 per cent in 1983.
Lee says the only reason interest rates had to go so high back then was that the Bank of Canada didn’t recognize the inflation crisis before it was too late — prices crept up over the course of more than a decade, compared to the sudden jump in just a few month’s time that we’re seeing today.
Central banks around the world did not chiefly use their policy rates to tackle inflation by that point in history. Canada was among the first to adopt inflation targeting as a mandate in 1991.
Though Lee believes the Bank of Canada again waited too long to address bubbling inflation, today’s reaction is years ahead of the 1980s response.
“The longer you postpone taking the medicine, the worse the problem gets. And the tougher the medicine becomes,” he says.
Lee projects interest rates will not have to rise as high as they did 40 years ago and the Bank of Canada has reacted in time to skirt double-digit inflation figures.
Orlando says that so far, the Bank of Canada has maintained belief among Canadians and businesses that it will get inflation back to target — a critical tool in its own right to keep expectations in line and stop high inflation from becoming entrenched.
“The belief is still there. And I think the inflation target is a big contributor to that.”
In its forecast this week, BMO projected that inflation would peak in the third quarter of 2022, dropping to an average of eight per cent in the fourth quarter and following a steady decline through 2023.
Tu Nguyen, an economist with RSM Canada, tells Global News that there are signs inflation could peak this summer, but what determines that is largely outside the Bank of Canada’s purview.
Oil prices have shown signs of decline over the past month from their peaks this past spring, and the aggressive action taken by central banks around the world should dampen consumer demand and give supply chains time to catch up.
But while global pressures have shown signs of easing, they can just as easily persist or even reverse course through the fall, Nguyen warned.
“There is still a war going on,” she said. “There’s a lot of instability, geopolitical tensions and a pandemic raging. And who knows what’s going to happen on the global stage over the next six months.”
— with files from Global News’ Anne Gaviola
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