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INFLATION: Why are we so concerned about it?
Dated: December 23 2022
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Inflation is a phenomenon that can cause major disruptions to an economy. It’s important to understand the underlying causes of inflation in order to take appropriate preventative measures. Here, we will look at the various causes of inflation and how they might be addressed.
The most immediate and prominent cause of inflation is an increase in money supply. When too much money is circulating within the economy, it diminishes the value of each individual dollar, leading to higher prices in goods and services. Countries like Canada, did this during the pandemic to help increase the amount of money and services available to Canadian people and businesses to help them cope during lockdowns. To combat this, Canada and many other countries are employing contractionary monetary policies, such as raising interest rates or decreasing government spending.
Another common cause of inflation is rising demand for goods and services relative to their availability. This often happens when economic growth accelerates quickly, leading people with more money to bid up prices on items they want or need. The housing market was especially vulnerable to this for a couple of reasons. Firstly the lockdowns restricted new home building projects. The second, was Canada's immigration policy that allowed over 450,000 people a year move to Canada. Canada was built on immigration, but the third factor was less inventory being made available for those people needing housing. Another example was the price of vehicles. Supply was restricted because parts were restricted for many reasons, but the lockdowns played a big role in disrupting the global supply chain. One way these areas can be addressed is through increased production and shortages being alleviated by increased competition from other suppliers or imports from abroad. We will see some items like automobiles come back in-line once supply chains improve. In Canada though, immigration will remain strong with an expected two million people immigrating to Canada over the next four years. Demand will continue to outpace supply for a number of years to come keeping pressure on housing prices and the cost for renting.
Other factors that may lead to inflation include wage pressures from a tight labor market and commodity price volatility due to events like political instability or natural disasters. Governments use fiscal policy – such as taxes or subsidies – to help mitigate these causes of inflation where possible. Since March we have seen seven rate increases from the bank of Canada to slow borrowing and reduce spending. This has had an immediate effect on home prices, but is pushing people into renting instead of purchasing. Now we are seeing rent prices increase due to increased demand. As the availability of money tightens, people will be forced to reduce their spending on luxury items like vacation properties, entertainment, cars, boats and travel (to name a few).
Inflation can have damaging effects on both individuals and businesses if left unchecked, so it’s important for countries to understand its underlying causes in order to formulate effective strategies for prevention and mitigation. If you need an example of how damaging inflation can be, just look to Venezuela. It wasn't long ago this was one of the richest countries in the world. The South American country's economy has been submerged in a severe recession since 2014 while battling high inflation. In late 2021 and through 2022, Venezuela is starting to recover.
By employing strategies such as tightening monetary policy, increasing production potentials and using fiscal tools judiciously, countries around the world can strive towards a stable and prosperous economy free from the ravages of runaway inflation!
Paul Partridge
Paul was born in Barrie and raised on military bases around the world. Living a bit of a nomad lifestyle through the military, Paul has a solid understanding of what is required to picking up and mov....
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All information deemed reliable but not guaranteed. All properties are subject to prior sale, change or withdrawal. Neither listing broker(s) or information provider(s) shall be responsible for any typographical errors, misinformation, misprints and shall be held totally harmless. Listing(s) information is provided for consumer's personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing. The data relating