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Trevor Tombe: Inflation is falling, but hold your applause for the government

Commentary

Canada’s June 2023 inflation rate fell to 2.8 percent. Compared to 8.1 percent a year earlier, this is a significant improvement. This is inflation’s fastest decline in over forty years.

The finance minister was quick to claim credit, tweeting “Canada’s plan to bring down inflation is working”. 

But hold your applause. 

This drop in inflation isn’t the result of the government’s actions or policy choices. It’s largely due to a fall in global energy prices. This one factor alone accounts for a full 3.7 percentage point drop in Canada’s inflation over the past year. That’s 3.7 out of a total decline of 5.3 points. That means energy alone accounts for roughly 70 percent of the total improvement.

Whatever the cause, falling inflation is good news. But it doesn’t mean Canada’s affordability challenges are over. It just means things are not getting worse as fast. 

Consider this: had inflation remained on target since February 2020, prices would be about 7 percent higher today—half the increase we have seen. To be precise, prices are now 6.3 percent higher than they would have been had inflation remained on target.

The recent return of inflation closer to its two percent target simply means prices are rising at a more normal pace, not that affordability has improved.

And if we successfully maintain inflation at 2 percent from this point forward, we effectively lock in this overall increase. Even this is optimistic since inflation remains above target and the Bank of Canada expects that to continue for a while longer.

Simply put, affordability will remain a major issue for years to come.

For perspective, if prices were magically frozen at today’s level, it would take a little over three years to return to our previous price level trajectory. That’s July 2026, well after the next federal election.

It is unclear how long it will take Canadians to regain their purchasing power. Wages usually rise faster than prices. Not by much, of course, especially given Canada’s disappointing recent productivity growth. In the decade before the pandemic, average hourly wages grew by roughly 2.5 percent per year. Inflation over that same period averaged 1.7 percent. If this same gap between earnings and inflation continues, it will take nearly eight years for real (inflation-adjusted) earnings to rise enough to offset the 6.3 percent rise in prices. 

Perhaps more concerning for many—and potentially more relevant to understanding the psychological and political dynamics of affordability as an issue—is the fact that prices have ratcheted up even more for many of the most important items we buy. Food prices are nearly 14 percent higher than they would have been if annual increases were limited to 2 percent. And this gap continues to widen. 

Transportation prices (up largely because of gasoline) are still 7.7 percent higher, despite recent declines. Shelter prices are 9.4 percent above what they would have been. Health and personal care items are 6.2 percent higher. And so on.

Not everything is more expensive. But almost everything is.

Using detailed data on products tracked by Statistics Canada that form the basis of the Bank of Canada’s core inflation measures, I estimate that nearly 85 percent of consumer spending is on goods whose price levels rose faster than the target rate of inflation. I illustrate each below, both in terms of price changes since February 2020 and each item’s share of average household consumer spending.

Internet and phone plans are cheaper. Recreational and clothing prices have dropped too. And childcare services are nearly 8 percent cheaper than before the pandemic. 

But almost everything else is way up.

To be clear, the price of specific items will rise and fall as supply and demand conditions change. On average, though, price levels have permanently ratcheted up for the simple reason that the Bank of Canada targets inflation, not prices. It is legally mandated to target average annual price increases of two percent. For price levels to return to their prior trajectory anytime soon would require deflation, which the Bank will not permit.

I’m not suggesting this is a problem with the Bank of Canada’s mandate. Not at all. There are pros and cons to targeting inflation rather than price levels.For some excellent research and discussion, see material produced for a recent conference at the Max Bell School of Public Policy. Returning Canada back to its previous path—which would keep average inflation at 2 percent over the long run and provide more certainty to individuals and businesses—comes at the cost of a more volatile economy. It may also be confusing. Regardless, the current mandate is in place until December 31, 2026, and it would be extremely unwise for the government to change it before then. 

To improve affordability, governments must look to other policies. At the risk of sounding like a broken record, there should be no more important priority than boosting Canada’s lagging productivity growth, building more, and avoiding unnecessarily costly policy mistakes

Unfortunately, even a renewed focus on improving Canada’s economy will take time to bear fruit. In the meantime, while the recent decrease in inflation is welcome news, the reality is that Canada’s affordability challenges will persist for many years to come.

Janet Bufton: Our politics are getting more exciting—And that’s a bad sign

Commentary

I used to think we shouldn’t bother with politics. I discouraged voting unless there was a candidate you really believed in (and when I did, I suspected there wasn’t anyone you really believed in). These were easy positions to take when it seemed like we could take things like political norms for granted. I didn’t appreciate how lucky we were. 

Now, there is probably more reason to care about politics than there has been for most of my adult life. Illiberalism is on the rise in the United States and around the world. Governments in countries like Russia and China are working to undermine liberalism and democracy. Issues that seemed settled, like 2SLGBTQ+ and reproductive rights, are politically at play again in the United States. 

Canada has so far weathered the illiberal backslide fairly well, but that’s not something to take for granted. Political instability from the United States threatens to spill over the border. Canada has a history of populist politics that could take an ugly turn in an environment where so many people feel like everything is broken. A look around the world shows what might not have been obvious only a few years ago: the moral arc of history doesn’t automatically move us in any direction.

But there’s a problem: we’ve become addicted to a sort of politics that is a satisfying pastime because it feeds off the worst of our tribalist impulses and need for belonging, but is unmoored from the foundations on which liberal democracy rests. It’s tempting to play the game of politics. But if we want to preserve the hard-won gains that have made Canada one of the freest and most prosperous countries in the world, we have to rediscover a less satisfying politics: the work of governance. It’s hard work. And it’s worth it.

Polarization, an outcome of satisfying, tribalist politics, is great if you’re a politician. Polarize the electorate and you don’t have to answer for your record. Or promise anything in particular. Or engage with what your opposition is actually saying or doing. Just speak to—no, shout at—no, shout with! shout for! your base. After all, angry and frightened supporters don’t just vote. They give money

Tribalism isn’t a new force in our politics, but we’ve let it take the wheel. It’s part of a vicious cycle. Macleans found in 2019, before the upheaval of the pandemic, that a quarter of Canadians actually hated their political opponents. That kind of acrimonious opposition gives people something that feels worth fighting against, and the camaraderie built in a righteous fight strengthens feelings of both belonging and opposition. It is very human to sometimes want to shout indignantly. But it has become almost all that we do because it is satisfying to have people sympathize with our indignation. 

I regret to inform you that improving this situation is up to us. 

A liberal democracy can coast for a while on institutional strength and broad consensus. So long as most people are generally happy with how things are going (or have made peace with the way things are) it’s easy to believe that something like a social contract will keep things on track. Hamish MacAuley makes a compelling case that many Canadians came of age politically between the fall of the Berlin Wall and the 2008 financial crisis when consensus was broad and politics was optional, so they opted out. In times that were good, we lost the habits of democratic governance. We played at politics instead.

In response, McGill’s Jacob T. Levy argues for political action that doesn’t consent to the way things are but also refuses to burn it all down or take our ball and go home. We should participate in politics even—maybe even especially—when it’s not satisfying.

When the foundations of our political order or the rights of vulnerable people are in danger, it makes sense to hand power to politicians who wouldn’t in better circumstances deserve it. It can make sense to join our opponents in criticizing someone we think is obviously the best candidate to hold power. We shouldn’t pretend that there’s no downside to making such a choice, we only have to identify when the benefits outweigh the costs. 

We need to resist the urge to indulge our worst impulses just because it’s so satisfying. Satisfying politics will tell us that a choice is good just because it’s the choice we (or someone on our side) made. Instead, we need to step back and recognize when politics is making us worse. We need to distinguish political rivals from enemies. We have to get better at distinguishing politics as an increasingly combative and antisocial form of entertainment from the politics that we need to address social problems.  

Joining a political party is almost certainly the wrong move. It’s among partisan voters that tribal pressures to gang up and war with The Other Side are strongest. And going through the motions of voting along party lines might not be actively harmful, but it’s unlikely to change the underlying problems that ail us. 

A better strategy is to start with a personal inventory: how are you participating? Are you doing the work or are you still playing? Can you explain different sides of the issues you care about in a way that proponents of each view would recognize? Do you have conversations with folks with whom you disagree with the goal of building understanding, rather than fact-checking or changing minds? Can you articulate specific changes that should be made to policies you disagree with, independent of the positions or posturing of political parties? Do you look for concrete ways to improve things in your community? These are all places we can start to strengthen the foundations on which less superficial politics should rest. 

This isn’t to say that we all just need to learn to accept what seems unacceptable. Persuasion matters, and it’s badly neglected in our politics. Trying to embarrass, shame, or exile everyone who disagrees with us might be satisfying, but isn’t improving things. Persuasion needs a foundation of understanding, whether it’s taking the time to understand the feelings and beliefs underlying positions we disagree with, or just working hard to start with an assumption of goodwill. 

This is all work and it will take emotional resources. But laziness and lack of effort aren’t the problem. While being angry all the time and looking for people to fight might be satisfying, it’s also exhausting. 

If we carry on as we have been and settle for satisfying politics, we won’t hold governments and politicians accountable. We won’t have the conversations we need to build understanding rather than push potential partners toward radicalization. People who have something valuable to add will simply throw up their hands and stay on the sidelines.

And if we only settle for what’s satisfying, we won’t be able to swallow an unpleasant truth: that we’ve dug ourselves deep enough into this hole that there’s probably no clean way out. There’s not One Neat Trick to shore up liberalism and democracy. 

Things have been worse before, and we made them better. Our situation isn’t impossible, it’s just hard. We’ve cared enough to get angry for long enough. Now we should care enough to do the work.

I don’t expect this essay to change many minds. But hopefully, the next time you gear up to start a fight in a comment section or doomscroll through your newsfeed, I can spark some doubt. Pleading with people to do the work—the real work—of politics is not particularly satisfying. But if enough of us can care enough to be persistent, patient, and kind about the things that matter, no matter how far away success might seem, we can start to shore up the foundations of liberal democracy. That has to start being satisfying enough.The author would like to thank Prof. Lauren Hall for her feedback on this piece. She’s responsible for many improvements, but no remaining shortcomings.