Maces and Rams

No one needs to study inflation to know its effects. If you make money, he buys less. If you owe money at a fixed interest rate, you have a huge advantage because you are repaying these loans with less purchasing power than what you borrowed.
Opinions are divided on whether inflation is the worst thing that can happen to an economy. Generally speaking, economists and other policy buffs believe that falling prices – deflation – is worse, because once the downward spiral has started, it is almost impossible to stop it. Lower prices mean lower revenues and profit margins for businesses, leading to layoffs, fewer hirings, stagnant wages, and outright pay cuts. Low-income consumers have less money to spend, locking the cycle in place. With sales falling, companies are further reducing their prices to do business. Then everyone realizes that the prices are going down, and nobody wants to buy today if it will be cheaper tomorrow.
No one is talking about deflation today. Today, inflation is the enemy and everyone who speaks for governments or central banks speaks the same language: interest rates are the weapon of choice and pushing them up will defeat inflation. ‘enemy. The headlines set us up for big interest rate hikes, followed by a downturn in everything that depended on cheap money, followed perhaps by rising unemployment, recession and… praise – back at 2% inflation.
We should be so lucky. Some elements oppose this not quite idyllic trajectory.
Monetary policy – ​​the mechanism by which interest rates rise or fall – does not operate with surgical precision. It’s more like a sledgehammer because of the indefinite amount of time it takes for an interest rate hike to spread through the different sectors of the economy – mortgage rates, savings rates, construction industry , service sector. Also, government spokespeople and central bankers may seem to be saying the same things, but they often act in opposite directions: the central bank raises rates to get you to spend less, and the government announces new spending programs. to mitigate the effect of rising interest rates. Consider Prime Minister Trudeau’s recent announcements to double the Goods and Services Tax Credit (CGPS), direct payments of up to $1,300 per child over the next two years for dental services, and a one-time top-up to the Canada Housing Benefit to deliver $500 to 1.8 million Canadian renters as rams aimed squarely at the sledgehammer of rising interest.
Then there’s the theory that inflation and unemployment have an inverse, stable relationship – when inflation is up, unemployment is down, so to bring inflation down, you just have to drive up the unemployment. That might have been a reasonable belief when there were a lot of people looking for jobs, but it’s hard to say how it works when people don’t exist to fill all the jobs. Almost everywhere in the world there are not enough workers because the population is aging and we don’t have enough babies to replace them. This is called a structural shortage. It is not going to be corrected by increasing unemployment. The only way to keep people in the job market and eventually attract them is to offer them more money and/or improve their working conditions.
Some things about the future that we can say with some degree of certainty:
Reality does not always follow the textbook of theory.
Politicians, policy buffs and central bankers say they form a united front, but they often work at cross purposes.
We citizens are always the guinea pigs.
We need our own “best interests” financial and life plan.

Dian Cohen, CM, OM, Economist
[email protected]
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