High inflation, which had been forgotten for 30 years, is now hitting hard, reaching 6.8% between April 2022 and April 2021, according to Statistics Canada. While it was announced as temporary, inflation seems to be taking hold for a longer period of time.
The classic intervention to fight against inflation belongs to the Bank of Canada. Although the latter has already raised its key rate by half a point to bring it to 1%, several voices are raised in favor of an intensification of this monetary tightening from the 1er next June.
As economists, we consider that this solution risks being ineffective because it targets the bad causes of inflation and threatens to penalize those who are supposed to be protected by causing an economic slowdown and an explosion of indebtedness.
The modus operandi is as follows: by raising its key rate, the Bank of Canada causes interest rates to rise. Faced with high borrowing costs, economic players are restricting their activities: fewer companies will invest, fewer people will buy houses, fewer renovation projects will be started and the idea of buying on credit loses its appeal. attraction. This slack in economic demand should lead to downward pressure on prices. However, as the 1980s and 1990s show, this fight against inflation can sometimes come at the cost of economic stagnation, even a recession or an increase in unemployment.
The current inflation is mainly caused by extraordinary factors related to the exit from the pandemic and the war against Ukraine. Combined with the labor shortage, they are restricting the ability of companies to offer goods and services in as large a quantity as before the crisis and they are increasing their production costs.
Also, Desjardins recently published data according to which companies are generating earnings per share that are on average 30% higher than before the crisis. In other words, could some companies take advantage of the inflationary context to raise their prices, simply to increase their profits?
We are concerned that a rise in the key interest rate corresponds roughly to a transfer of funds from the pockets of households to the coffers of banks and their shareholders. The people most sensitive to an increase in interest to be paid on their debts; families who have recently taken out a mortgage; young people with significant student debt… They are the ones who will bear the brunt of the fight against inflation. For large holders of financial wealth, rising interest rates mean that the value of their assets will be protected.
If the government were genuinely concerned about protecting the living standards of families, it would use other strategies to slow price growth and raise incomes.
Implementing a rent control policy, launching large social housing construction sites and severely regulating the short-term tourist rental of housing are a few examples. The government can also reduce the prices it controls: Hydro-Québec rates, tuition fees, childcare costs, public transit passes, etc. It can subsidize food self-sufficiency initiatives, promote local sources of supply and support the transition away from oil.
It can also substantially increase the minimum wage and transfers to people living in poverty. In short, let’s prefer policies that really help people affected by the rising cost of living rather than falling back solely on tightening access to credit.
*Also signed this letter: Simon Tremblay-Pepin (political scientist and economist, professor at Saint Paul University), Minh Nguyen (socio-economist), Mario Seccareccia (professor emeritus at the University of Ottawa), Eric Pineault (professor at UQAM), Mario Jodoin (economist), Normand Pépin (sociologist), Pierre Beaulne (economist), François Bélanger (economist, union advisor in the Research and Status of Women Department of the CSN), Pierre-Alexandre Caron ( economist at the SFPQ), Lise Côté (economist, research advisor at the FTQ), Joëlle J. Leclaire (professor SUNY Buffalo State University), François Desrochers (public policy analyst at the APTS), Ruth Rose-Lisée (professor emeritus at UQAM) and Marguerite Mendell (professor emeritus at Concordia University).