Liberal’s government attributes spiking inflation to global factors, but now takes credit for its slowdown
When inflation was spiking and straining budgets after the worst months of the COVID-19 pandemic, the Liberal government was eager to blame the pain on factors outside its control.
“I am impressed to see the high esteem in which the member for Carleton seems to hold me, that I was able to create a global inflation crisis,” said Prime Minister Justin Trudeau during a typical exchange with Conservative Leader Pierre Poilievre in the House of Commons on Nov. 24, 2021.
Now, almost three years later, inflation has slowed. The year-over-year rate posted in June was 2.7 per cent — far below the recent surge’s peak of 8.1 per cent in June 2022. The Bank of Canada, which had responded to rising prices by cranking up interest rates to levels not seen in years, has started lowering them again, proffering hope for mortgage holders and others who saw increased debt payments added to their recent affordability woes.
And wouldn’t you know it, here come the governing Liberals to take credit for this sunny turn in monetary affairs.
Finance Minister Chrystia Freeland hailed the June inflation rate, and the central bank’s ensuing interest rate cut, and suggested it was connected to her handling of the country’s finances.
“Our responsible economic and fiscal plan is working,” Freeland wrote on X.
A Liberal party fundraising email distributed this week made the same claim. “Our plan is working: inflation and interest rates are coming down while we invest in Canadians and grow the economy,” boasted Citizens Services Minister Terry Beech.
It doesn’t take an economist to twig to the inconsistency here. But five of them who spoke to the Star for this story generally agreed that global factors — or factors common across many countries, like high spending on pandemic supports — were primarily responsible for the spike in inflation, and that global factors — along with central bank interest rate hikes — are the main reasons it has slowed in recent months.
In other words, the federal government wasn’t at fault — or at least not entirely at fault — then, and it’s not the main saviour now.
“Just as you could not call higher inflation ‘Just-inflation’” — the Conservatives’ cheeky portmanteau of Trudeau’s first name and inflation — “I don’t think you can credit government policies with the decrease in inflation that’s happening right now,” added Sheila Block, senior economist with the Canadian Centre for Policy Alternatives (CCPA).
The true causes
So what’s actually behind the inflation slowdown?
Several economists said a major factor is that the causes of the surge are easing. Supply chains that struggled when pandemic restrictions were lifted have adjusted to better meet consumer demand. Russia’s invasion of Ukraine, which caused the prices of commodities like oil to spike, is still raging, but businesses have adjusted and market fears of constrained supplies have eased.
“There’s a huge downdraft on inflation because of these international factors that were so dominant before,” said James Orlando, director of economics at TD Bank.
Central banks around the world, including the Bank of Canada, also responded to surging prices by increasing interest rates. That makes it more expensive to borrow money, which in turn slows economic activity and is supposed to drag back the growth in prices, explained Thomas Torgerson, co-head of the global sovereign ratings group at Morningstar DBRS.
“Ultimately, the (central bank) policy response is what I would credit for the gradual slowdown,” Torgerson said.
Can the government take credit for any of this?
But that’s not to say the government has played no role. According to some economists, the Liberals could take credit for one thing: they haven’t made things worse.
Kevin Milligan, an economics professor at the University of British Columbia, described this as a “dog that didn’t bark.” Under Freeland, the Liberal budget restrained spending to meet the government’s fiscal goals of limiting the deficit to $40 billion and putting Ottawa on track for declining debt in proportion to the size of the economy.
Higher government spending, the argument goes, puts more money into the economy and adds to inflation.
Milligan, who said he occasionally advised Freeland ahead of this year’s federal budget, said Ottawa has refrained from doing that — despite the opposition criticism to the contrary.
“They didn’t add fuel to the fire,” Milligan said, describing the recent budget deficit as between one and two per cent of GDP, which he said was lower than many peer countries.
“What we saw in Canada … was frankly a fairly tight fiscal policy,” he said.
Katherine Cuplinskas, a spokesperson for Freeland’s office, pointed to Bank of Canada governor Tiff Macklem’s comment that this year’s budget wouldn’t have a big impact on economic growth projections or price increases.
“We are using every tool at our disposal to support the Bank of Canada as it delivers on its mandate to return inflation to target,” Cuplinskas said by email Friday.
“While we are investing in the priorities of Canadians — to build more homes, make life cost less, and grow the economy — we are taking care not to feed inflation. That means carefully targeting new investments and ensuring Canada’s finances are sustainable.”
Even so, some economists view the level of federal spending as part of the inflation challenge. Take programs like the government’s $30-billion plan to expand affordable child care, or its $1.5-billion plan to pay for birth control and diabetes medication as a first step toward a national public pharmacare program.
On one level, as TD’s Orlando said, these programs help people bear the burden of higher inflation. On another, they put more money into the economy and add to government spending, which Orlando’s bank forecasts will grow faster than Canada’s gross domestic product (GDP) this year, and is therefore an inflationary force.
“They’ve made it harder for inflation to come down for sure,” said Scotiabank chief economist Jean-François Perreault, referring to government supports from Ottawa and the provinces.
“These programs, as well intentioned as they might have been, made the Bank of Canada’s job a little bit harder.”
Another area where the government could take credit, Perreault added, is in its efforts to push businesses like grocery chains to rein in prices. Inflation in that area has lowered, and Perreault said there is at least a “correlation” between Ottawa’s efforts and the slower pace of price increases.
But the bottom line, for Perreault and others, is that the Liberal government is not the prime mover of inflation.
“I wouldn’t say from a macro perspective (the federal government has) contributed to lower inflation,” he said. “They maybe have not recently made things worse, but that’s not the same as helping bring inflation down.”
This article was first reported by The Star
