Taming Inflation Can Be Worse Than Inflation

The ghost of John Crow haunts us still.

In his seven years as Governor of the Bank of Canada starting in 1987, Crow presided like a gunslinging vigilante over the Canadian economy, relentlessly raising interest rates in his battle against inflation -- even though Canadian inflation wasn't really much of a problem (peaking at 5.6 percent a year in 1991).

Crow's conquest of inflation came at a high price for millions of Canadians -- many of whom are still struggling to regain economic ground they lost when his punishingly high-interest rates pushed Canada into deep recession in 1990-92, throwing hundreds of thousands out of work.

Since the Crow era ended in 1994, the Bank has stayed on the track he established -- keeping inflation rigidly in check, never allowing it to stray much above 2 percent a year.

Now, with a recovering economy in the wake of the pandemic, the bank has allowed our inflation rate to creep up to 4.7 percent -- a far cry from "runaway" or "galloping" inflation. Even so, it's prompting howls of outrage from Bay Street.

Finance Minister Chrystia Freeland moved to reassure Bay Street earlier this week, announcing that inflation-fighting will remain unequivocally the top priority of the Bank of Canada for the next five years. In renewing the bank's mandate like this, she has kept Canada on the very-low inflation path Crow established years ago.

There had been speculation she might buck the financial establishment and create a "dual mandate," requiring the bank to prioritize not just fighting inflation but also battling the real scourge faced by workers -- high unemployment.

In the end, she appeased Bay Street, settling for vague instructions that the Bank also keep an eye on labor markets.

Although few Canadians were lying awake at night wondering what Freeland would decide, in fact, her decision will be one of the most consequential in shaping post-pandemic Canada.

Many Canadians may soon actually suffer from insomnia, terrified of losing their homes due to crippling interest rates -- as so many did in the early '90s.

Bay Street isn't shy about advocating higher interest rates. Earlier this week, prominent inflation hawk William Robson published an op-ed calling for higher rates -- possibly much higher.

As CEO of the corporate-funded C.D. Howe Institute, Robson is always on guard against anything threatening the interests of the wealthy. And one of the biggest threats to the moneyed class is inflation.

That's because inflation erodes the real value of money. This hurts people who have a lot of money, but can help those who owe a lot of money.

Imagine you owe the bank $50,000. If the dollar's value is eroded by 5 per cent inflation, then the real cost of repaying that debt shrinks by 5 percent -- benefiting you and hurting the bank.

Of course, inflation also means higher prices for consumer goods, which hurts workers -- unless their wages are growing as fast or faster.

While Canadian inflation is running at 4.7 percent, Canadian wages are also rising. For some of the most disadvantaged workers (new hires), average wages are growing at the impressive rate of 10 percent a year -- putting them well ahead of inflation.

And this booming labor market may get better yet, as contracts expire and new ones are negotiated at a time when workers are wielding more power than they have in decades.

It is this resurgent bargaining power of workers that the corporate elite truly fears.

Of course, the standard media narrative is that everyone should be very worried about inflation. Here's a simple question to determine whether you should be: Am I rich?

If the answer is no, chances are you'd be better off with a little inflation than with high-interest rates aimed at crushing it.

While celebrated at the C.D. Howe Institute, John Crow's brutal legacy properly belongs in the history books.