MODERN MONETARY FANTASIES.

As any survey of economic and political opinion would demonstrate, the global inflation upswing has many identified causes. Supply-chain issues, rising demand, trucker shortages along with corporate monopolistic behaviour are routinely cited as the primary drivers of rising consumer prices. U.S. President Joe Biden, his finger stuck in a dike to ward off a rising tide of global and economic crises, has blamed U.S. meatpackers and members of the OPEC+ group of oil producing nations.

These are all tidy explanations that also have a following in Canada. In a commentary this week in The Hub, University of Calgary economist Trevor Tombe more or less waved away the Canadian inflation problem — approaching a 5.0 per cent annual rate — as mostly the product of a global oil price surge and a national housing price issue.

In Tombe’s view, the gasoline story is simple, driven by a production shortage in the face of demand swings brought on by the pandemic. And housing prices are going up all over the world. “It’s not unique to Canada,” he concludes, so let’s just calm down. “Since Canada’s inflation story is more about gasoline and home prices than anything else, if home prices do not continue their rapid rise and if gasoline prices also stabilize, then inflation may fall back to normal later this year.”

There may, however, be more to the inflation problem than the price of oil and housing. Gyrations in global bond and stock markets offer evidence that dealing with inflation, and correcting its fiscal and monetary causes, involves more than simply tracking a couple of price measures and treating inflation as a microeconomic problem.

The Bank of Canada used to take the Tombe back-to-normal-soon stance, claiming inflation to be just a temporary issue, but changed its stance a couple of months ago and is now expected to accelerate an anti-inflation plan with as many as six interest rate hikes this year, including one as soon as this week. The BOC is also pulling back on its big bond buying program.

In the United States, the U.S. Federal Reserve also shifted its view of inflation and moved it into the longer-term problem category, one that required more significant action. All of which leaves President Biden in a rough spot economically, compounding the trouble he’s in over the Russia-ukraine conflict. Not only does Biden have to face Putin, he has to now “face the inflation music,” as Wall Street Journal columnist William Galston put it.

Americans, like Canadians, now rank inflation and economic problems as their top issue. More than 60 per cent of Americans say they are falling behind in meeting the cost of living. A similar number emerged in a recent Angus Reid Institute poll of Canadians which found that 57 per cent say it is “currently difficult to feed their household” compared with 36 per cent in 2019.

The inflation situation, in other words, runs from the top of the economy as financial markets spin down to the average individual family. How the world got to what appears to be an inflation crisis is now the most important economic issue on the agenda.

Attempts to narrow the rising prices problem down to a few microeconomic developments such as oil prices and supply chain issues will not succeed if, as now seems likely, the inflation trends turn into a longer term problem that distorts national and global economic development and leads to slower growth and losses to institutions and individuals.

In Ottawa this week, the idea that micro issues are behind inflation’s rise became the focus of the Commons Finance Committee, which is holding online hearings on the subject “Inflation in the Current Canadian Economy.” Oil and housing prices were at the top of the discussion list, but the real root cause of rising prices were clearly identified by Philip Cross, senior fellow at the Macdonald-laurier Institute.

At one point during a committee session Monday, Cross was asked, “Do you think large deficit spending is contributing to inflation?” In response, Cross identified the origins of the inflation surge policy-makers want to avoid. “There’s no question in the current circumstances, especially since the Bank of Canada was monetizing that debt. Fiscal stimulus became monetary stimulus.”

Cross also highlighted a little-known statistical quirk in Canada’s inflation rate, which is said to be about 4.8 per cent versus the U.S. rate of about seven. In fact, said Cross, if Canada were to include the price of used automobiles (as does the U.S. rate), Canada’s national inflation rate would also be close to seven per cent.

Bank of Nova Scotia chief economist Jean-françois Perrault told the committee the Bank of Canada had become “more stimulative” though 2020 to 2021. “Part of the fact we are in a situation now with inflation is it reflects that collectively governments around the world just all erred on the side of caution. All probably did more than what was required.”

It would not be the first time central banks overreacted with excess stimulation based on uncertain monetary policy. About 50 years ago, OPEC launched an oil embargo that led to a tripling of the world oil price. Monetary theorists believed the recession that followed could be offset with monetary expansion, a disastrous move that produced The Great Inflation and ultimately wage and price controls.

It’s a history lesson policy-makers seem to have forgotten as they replaced it with modern monetary fantasies to fight the pandemic.

GETTING CLOSER TO IDENTIFYING INFLATION PERPETRATORS.