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Inflation in Alberta

As a result of generous monetary policy during the brunt of the COVID-19 pandemic, most of the world is experiencing the effects of inflation today. Canada is no exception, with inflation reaching 8.1% in June 2022, a 30-year high. Historically, the Bank of Canada seeks to ensure inflation is between 1.0 – 2.0%, and so, to try and get inflation under control, interest rates have been hiked to 2.5. In theory, with rising interest rates (and therefore, harder access to financial capital), prices and demand for capital should cool down. Unfortunately, this could take months to occur. Furthermore, historically, while this tactic has worked in cooling inflation in the past, it has also contributed to creating the conditions necessary for a recession. 

Ultimately, the Government of Canada, through fiscal policy, and the independent Bank of Canada, through monetary policy, will need to work together, as they did during the COVID-19 pandemic, to coordinate an effective response to inflation.

For the time being, Canadians must contend with rising costs as their purchasing power reduces from rising expenses. While wage hikes have made these expenses more digestible, high inflation largely renders these hikes moot. In essence, the Government (and the Bank of Canada) is stuck between a rock and a hard place. Given the current rates of inflation, action must be undertaken to ensure that Canadians can continually put food on the table and purchase other necessities. On the other hand, preventing a full-blown recession (one that is overdue from the effects of the pandemic itself) would likely have worse economic consequences. 

In the meantime, politicians without an economics background from the left and right are discussing various policy options as to how to combat the current inflation problem. For instance, Prime Minister Trudeau has been reminding Canadians that inflation is not entirely under their control, with frequent blame pointed to the war in Ukraine and other supply chain backlogs. While this is true, record-low interest rates and the increased monetary supply caused by pandemic spending are more to blame for the current inflation rates, and this development has been forecasted for some time now. On the right, federal Conservative Member of Parliament, and a front-runner for the Conservative Party of Canada leadership race, Pierre Poilievre has also promised to fire the Bank of Canada Governor, Tiff Macklem, and enact other policies to help resolve the issue. However, these takes are misinformed, at best. While it is easy to blame the Bank of Canada for increasing the monetary supply in the country during the onset of the pandemic, it should be noted that a major concern in mid-2020 was that deflation could be caused by the slowing economic activity as a result of the pandemic. Deflation may have led to worse economic consequences, like mass unemployment. Central banks around the world emulated similar strategies of increasing monetary supply to combat this threat, and so, lamenting the move is likely a form of hindsight bias. 

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