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. Although announced as temporary, inflation appears to be taking hold for a longer period of time.
The classic intervention, to fight inflation, belongs to the Bank of Canada. Although the latter has already raised its reference rate by half a point to 1%, many voices are in favor of intensifying this monetary tightening as of June 1.
As economists, we believe 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 this: By raising its key rate, the Bank of Canada causes interest rates to rise. Faced with high borrowing costs, economic actors 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 is losing its appeal.
This slack in economic demand should lead to downward pressure on prices. However, as the 1980s and 1990s made clear, this fight against inflation can sometimes come at the cost of economic stagnation, even a recession, or rising unemployment.
The current inflation is mainly due to extraordinary factors related to the end of the pandemic and the war against Ukraine. Combined with labor shortages, they are restricting the ability of companies to offer goods and services in the same quantity as before the crisis and are increasing their production costs.
In addition, Desjardins recently published data showing that companies are generating earnings per share on average 30% higher than before the crisis. In other words, is it possible that some companies are taking advantage of the inflationary context to raise their prices simply to increase their profits?
We are concerned that a rise in the benchmark interest rate roughly corresponds to a transfer of funds from the pockets of households to the coffers of banks and their shareholders. It is the people most sensitive to an increase in the interest to pay on their debts, families that have recently mortgaged or even young people with significant student debts 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 really concerned about protecting the standard of living of families, it would use other strategies to curb price growth and raise incomes.
The implementation of a rent control policy, the launch of large social housing construction works and the severe regulation of short-term tourist housing rentals are some examples. The government can also reduce the prices it controls: Hydro-Québec fees, tuition fees, childcare costs, public transport 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 us prefer policies that actually help people affected by the rising cost of living instead of resorting only to restricting access to credit.
Signatories:
Pierre AntoineHarvey
Economist at the Confederation of Quebec Trade Unions (CSQ)
Simon Tremblay-Pepin
Political scientist and economist, professor at the University of Saint Paul
Minh Nguyen
socioeconomist
mario seccareccia
Professor Emeritus at the University of Ottawa
Eric Pineault
Professor at UQAM
mario jodoin
Economist
norman cucumber
Sociologist
Pierre Beaulne
Economist
francois belanger
Economist, trade union advisor to the Department of Research and the Condition of Women of the National Confederation of Trade Unions (CSN)
Pierre-Alexandre Caron
Economist at the Public and Parapublic Services Union of Quebec (SFPQ)
Lisa Costa
Economist, Advisor to the Research Department, Quebec Federation of Labor (FTQ)
Joelle J Leclaire
Professor SUNY Buffalo State University
Francois Desrochers
Public Policy Analyst at the Alliance of Professional and Technical Personnel in Health and Social Services (APTS)
ruth rose lise
Emeritus Professor at UQAM
marguerite mendell
Emeritus Professor at Concordia University
#rate #hike