Inflation is high, pervasive, and often felt.  This is a dangerous combination

Inflation is high, pervasive, and often felt. This is a dangerous combination

Shoppers buy groceries at the Urban Fresh Produce stand at Saint Lawrence Market in Toronto on May 18.Fred Lom/The Globe and Mail

Two months ago, Jackie Chin caused a stir in Carbonaire, a town of about 5,000 residents in Newfoundland: He announced that Don’s Restaurant would not bring back its buffet.

At $16.99 before tax, the buffet has been a popular attraction in the city—residents have been eagerly awaiting its return, due to regional COVID-19 restrictions banning buffets for two years. During most of that time, Mr. Chen, owner of Don’s Restaurant which specializes in Chinese cuisine, has seen his food costs rise rapidly and nonstop.

So when the final rules on restaurants were lifted in March, Mr. Chen made the difficult decision to keep the buffet closed. Mathematics no longer makes sense.

“If we’re going to open the buffet, we’re going to have to raise the price about two or even three times,” said Chen, who recently raised most of his menu prices by $2 per dish.

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Don’s situation is just one example of how life has changed in an era of high inflation. Similar stories can be found anywhere in the country. Inflation was a marginal topic, and is now a dominant topic of discussion – on AM radio, in the grocery aisle and at the negotiating table.

This is a remarkable departure. For decades, consumer prices have grown at low and generally stable rates in Canada, along with other advanced economies. If policymakers complain about anything, it’s usually very low inflation.

Not anymore. In April, the annual inflation rate was 6.8 percent, the highest since 1991. Many economists say that due to the recent rise in gas prices, inflation could rise above 7 percent soon, the highest level in nearly four years. contracts. . The last time that rally was so high, Trudeau was the last prime minister and topped the turnover of the Canadian charts.

The problem is not just high inflation, but its spread. About 70 percent of the products and services that make up the Consumer Price Index (CPI) – the country’s main measure of inflation – are rising at more than 3 percent annually, making price hikes more difficult to avoid. Moreover, the reminders of hyperinflation are relentless, especially at gas stations, supermarkets, and places of frequent purchase.

These descriptions of inflation – high, pervasive and frequent – are a dangerous combination for the economy, especially for the Bank of Canada. Central bankers are trying to raise interest rates enough to quell inflation, but without pushing the economy into a painful recession. However, it is a very difficult feat.

“Historically, it has been very difficult to engineer smooth landings,” Michael Weber, associate professor at the University of Chicago’s Booth School of Business, said in an interview. I think it’s actually very unlikely that we’ll see inflation come down to the target rate of about 2 percent without a recession. I think it’s almost impossible.”

Even without a recession, people are making adjustments to their lives.

Rebecca Bradley of Victoria spends about $200 to fill up her Dodge Durango, which she uses to deliver food for a delivery app. The exorbitant cost of gasoline — locally, it jumped to about $2.30 for a regular unleaded liter — is eating away at her take-home wages. “It’s like you’re barely getting paid,” she said.

Mrs. Bradley, a mother of three, is aware of the waste of money. Make sure to freeze leftovers or overripe fruit. And for dinner, it’s usually a home-cooked meal. “We rarely get fast food anymore,” she said.

In Prince Edward Island, inflation is particularly high. The province’s CPI grew 8.9 percent in April from a year earlier, outpacing New Brunswick, the second-highest province at 7.6 percent.

Susan Marie, who is pictured on the island, used to buy certain gifts for her dog for $6.99. Now they cost $12.99. (“I’ll buy them because she likes them, they are great [and] She deserves it. ‘) Because of exorbitant gas prices, Mrs. Mary takes fewer trips to the beach, a 25-minute drive from where she is in Charlottetown.

“I lived in Calgary for nine years, and I used to pay city rates,” she said. “We are paying more now ‘on the island,’ for our gas, our food, our living expenses.”

These two components – gasoline and groceries – weigh heavily on consumer psyche. Many people buy them frequently, filtering their expectations for future inflation, according to a large body of economic studies. Consumers also tend to notice higher prices more than cuts.

Lately, they’ve had a lot to notice. Grocery prices jumped about 10 percent in April, the largest annual increase since 1981. This week, the average price of regular, unleaded gasoline exceeded $2 a liter for the first time.

Inflation expectations are important. Workers negotiate wages and firms set prices, respectively, based on their views of future costs. In this sense, inflation can be self-fulfilling.

Based on surveys conducted by the Bank of Canada for consumers and businesses, the Bank of Canada has found inflation expectations for the next two years to be high, but remain “well flat” over a five-year window. can change.

“Unfortunately, with grain and energy prices soaring, we probably haven’t seen peak food inflation yet,” Benjamin Ritzes, a price analyst at Bank of Montreal, said in a recent note to clients. “Besides the rise in gasoline prices, there is a real risk that inflation expectations will become unchallenged.”

In this scenario, the Bank of Canada would have to raise rates aggressively – perhaps above 3 per cent – to bring expectations back down to earth. (Her policy rate is currently 1 percent, and financial analysts widely expect the rate to reach 1.5 percent on June 1.)

The collateral damage can be significant for lower-income families, who have less savings—if any—and spend a greater proportion of their income on debt payments.

Neil Hetherington, CEO of Daily Bread Food Bank in Toronto, can already see the pressure.

In March of 2019, the food bank received nearly 60,000 customer visits. Last March, the number of visits rose to 160,000. Mr Hetherington said the numbers were “very dismal”, which he attributed the increase in part to higher inflation.

This, in turn, leads to a higher cost of operations. Before the pandemic, the annual food budget for daily bread was about $1.5 million. Mr. Hetherington estimates that food costs will reach $10 million in the next fiscal year.

“The situation is not improving, despite the openness of the economy,” he said.

Ron Knippon and Margarita Wilkins, researchers at the University of Calgary’s School of Public Policy, studied some of the factors that influence visits to food banks, with a particular focus on daily bread and social conditions in Toronto. In recently published research, they found that food bank visits rose with increases in rent, and with reductions in minimum wages and disability benefits, after accounting for inflation.

On those fronts, the current conditions are tough. Rents have jumped 4.5 percent over the past year, with larger increases in Ontario (5.3 percent) and British Columbia (6.4 percent). Average wages do not rise at the same pace as inflation, leaving millions of workers with a decline in purchasing power. The lackluster benefits through social assistance programs emerged this spring as an election issue in Ontario.

“We know that there is, essentially, a tidal wave of different factors all driving these extraordinary numbers to the food banks,” said Mr. Hetherington.

It’s hard to predict how all this will happen. Royce Mendes, head of macro strategy at Desjardins Securities, suspects that higher interest rates will dampen demand and that global inflationary pressures will stabilize.

But he added, “The conviction that I have on that fundamental issue is not very high.”

Mr. Mendes said the risks are twofold. On the other hand, it is possible that inflation will remain high if people continue to spend heavily, especially those families who have amassed massive savings during the pandemic. This would force central banks to raise interest rates aggressively. On the other hand, it is possible for an inflationary rise to harm people and businesses to the point that even without further price increases, the economy plunges into recession.

“Every day, there is new conflicting data,” Mr. Mendes said. “We don’t know – and we probably won’t know for a few more months – in which direction the economy is headed down.”

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2022-05-20 22:54:25

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