The latest inflation figures from both Canada and the United States show that inflation has been trending downward after a period of high volatility, due in part to higher interest rates and the restructuring of supply chains.
However, while economists agree that Canadians have seen the end of high inflation for the time being, there is a risk that future geopolitical turmoil could send prices for everyday goods surging higher once again.
“We’re on a good trajectory now. Things are slowing down in the long term. Policy measures that central banks have been employing are working,” said Eric Miller, president and founder of Rideau Potomac Strategy Group.
“But the problem you have is that new things will come along to disrupt this, and it will take time for governments and policymakers to come up with responses to those new measures.”
How We Got Here
Following the COVID-19 pandemic, global inflation skyrocketed as a result of factors such as global supply chain disruptions, increased government stimulus, and higher oil prices due to the Russia-Ukraine War.
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“The time has come for policy to adjust,” Powell said at the Fed’s annual retreat in Jackson Hole in Wyoming, Wyoming, on Aug. 23, adding that the direction inflation is headed is “clear.”
Reasons Inflation May Have Settled
According to William Huggins, an economics professor at McMaster University, central banks’ “medicine” of raising interest rates worked well at lowering inflation, but the process took a few years to kick in.
Huggins said higher interest rates effectively caused Canadians to cut back on spending, and while the Canadian economy did not technically enter into a recession as defined by two consecutive quarters of negative GDP growth, the country has been in a “shadow recession.”
While Miller agreed that higher interest rates have lowered inflation, he also pointed to the role played by energy prices, supply chains, and China’s changing role in the global economy.
Prices for many items were kept low for over 25 years due to China becoming the centre of global manufacturing, he said. But as China’s economy matured and production shifted to places like Vietnam and Mexico, prices began to rise.
“It was also the fact that we, in North America and elsewhere, have underinvested in our energy infrastructure,” Miller said, adding that Canada has a need for additional oil production and pipeline infrastructure.
Geopolitical Risks
Miller also noted several geopolitical risks that could cause inflation in Canada to spike again in the years to come, including possibilities of the United States engaging in tariff battles with other countires.
Huggins said that China remains a large risk factor for global inflation, especially given its aggressions against Taiwan.
He added that the Russia-Ukraine War, tensions between Iran and Israel, and the situation in Venezuela could affect global supply chains and push inflation higher.
