Employment & Unemployment,  Inflation,  Macroeconomics,  Research

Orthodox Cure for Inflation Will Be Worse than the Disease

Evidence is growing that Canada’s economy, and most other OECD nations, is heading into recession. Dramatic increases in interest rates around the world, motivated by a desire to clamp down inflation that broke out after the COVID pandemic, is undermining investment, job creation, and household spending power.

The Centre for Future Work has jointly released a major new report with the Canadian Labour Congress documenting the flaws in the Bank of Canada’s diagnosis of current inflation, and the risks in its one-sided approach to solving the problem. The report, titled A Cure Worse than the Disease? Toward a More Balanced Understanding of Inflation and What to Do About It, was prepared by Jim Stanford, Economist and Director of the Centre for Future Work.

The Bank of Canada argues current inflation comes from excessive domestic spending power and an “overheated” labour market. This view comes straight from economics textbooks written after 1970s ‘wage-price spirals’ and stagflation. But today’s inflation is very different, clearly due to unique, mostly global factors related to the economic shocks of the pandemic (including disrupted supply chains, higher transportation costs, and the energy price spike after Russia’s invasion of Ukraine). Real wages have declined (since nominal wages are growing slower than prices), and workers’ share of GDP has shrunk notably – in both cases opposite to what happened in the 1970s. Profits, however, have surged to an all-time record high as a share of GDP, proving companies have taken advantage of COVID disruptions to increase prices far more than required to simply meet higher input costs.

The report describes the faulty assumptions underlying the conventional diagnosis: including the belief that mere expectations of future inflation automatically cause future inflation. If workers don’t have bargaining power – or, worse yet, if their wages are suppressed by government order, as for public sector workers in Ontario – then their ‘expectations’ have little relevance for future wage gains.

The report also maps out a 6-point alternative strategy for managing current inflation in a fairer, more effective way – rather than throwing the whole economy into recession, which will make conditions far worse for workers.

Please see the full report, A Cure Worse than the Disease:

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.