Forget inflation, meet stagflation

This column by Armine Yalnizyan was originally published by the Toronto Star on Wednesday June 1, 2022. Armine is a Contributing Columnist to Toronto Star Business featured bi-weekly.

You thought inflation was bad? Buckle up. This ride is about to get bumpier.

With every passing month, inflation — seen in higher food, gas and housing costs — is squeezing your budget harder, with no end in sight.

We all want someone to do something, but the “cure” for inflation — rate hikes to cool higher prices — is almost guaranteed to be worse than the disease.

Rising prices and rising joblessness is the new fear, now that it’s clear inflation isn’t a passing problem, due to wave after wave of shocks to the global economy.

Now the word “stagflation” is making a comeback — the ugly reality where both prices and job loss are on the rise as economies stagnate.

Usually unemployment moves in the opposite direction from inflation; when prices rise it’s usually because the economy is running hot, which means there are more jobs.

When they move in the same direction, it’s a tougher problem to solve, because policies that cool prices usually create more job loss, but fixes for unemployment like more government spending or tax cuts can add fuel to inflation.

Price spikes combined with cooling economies looks like the track we’re on, one we haven’t seen since the 1970s, but now occurring for different reasons. Still, the punchline is that GDP growth is now slowing almost everywhere, including Canada.

In the first quarter of 2022, the U.S. economy actually shrank.

China’s stunning pace of economic expansion, which was once the ox that pulled the world’s cart, is now in threat. It is turning to stimulus to maintain its targeted growth pace of 1.5 per cent.

In Europe, even before the post-pandemic rebound is complete, growth forecasts are being downgraded because of coming restrictions on the use of Russian oil and gas.

If Europe, China and the U.S. are already on the path to “slowth” (slow or no growth), the risk of global recession isn’t far behind, because central banks everywhere are poised to “tame” inflation by aggressively hiking interest rates.

The Bank of Canada is expected to raise rates by half a percentage point Wednesday, the third increase since March 1, when the rate was 0.25 per cent.

We are within striking distance of the pre-pandemic policy rate of 1.75 per cent, and it is expected that rates will rise further.

It is true that central banks need to squelch expectations that inflation will only continue to rise, because what we expect is largely what we get.

It is also true that since the 1980s, the only response to a rising pace of inflation has been central banks hiking interest rates.

But the only inflation driver that central banks might influence by higher rates is moderating demand for housing, which may cool prices.

This could help renters more than first-time homebuyers.

And monetary policy may be eclipsed by market forces in cities like Toronto and Vancouver as China and Russia reduce overseas acquisitions and seek to repatriate foreign cash.

More properties for sale, but harder financing for buyers, could mean prices don’t just stop rising — they fall.

Be careful what you wish for.

Higher interest rates in Canada won’t end backlogs in shipments from China, or offset falling global exports of wheat or fertilizer due to the invasion of Ukraine by Russia, or cut global oil prices.

But they could trigger a recession by making it more expensive to borrow.

That means households will be spending more on basics like housing, leaving less for discretionary spending, while businesses will have fewer customers coming in and higher operating costs, causing them to reduce new hires or lay people off.

Unemployment could rise, albeit from low rates we haven’t seen in half a century.

While tighter labour markets have emerged in the wake of the pandemic, largely because of population aging in Canada and the U.S., these trends mean that labour’s bargaining power will be harder to exercise.

Simply put, you can’t ask for more when you don’t have a job.

Living in Canada offers a silver lining for producers and governments. We’re a commodity-rich economy, and Canadian production is rising to fill in shortfalls of global exports of gas, oil, wheat, other cereals and fertilizer.

But these are not job-rich sectors of the economy. Combine all mining, quarrying and oil and gas extraction jobs and you account for 1.1 per cent of the job market.

Manufacturing will be hit if the U.S. goes into recession, but Ontario’s been riding a wave of growth in high-tech, and if the Conservatives get re-elected in the province there will be a burst of spending on building roads and hospitals.

Whether that benefits unemployed Ontarians from falling purchasing power due to inflation is an open question.

When the Harper government boosted infrastructure spending in 2009 in the wake of the global financial crisis, we saw a big spike in the use of temporary foreign workers.

Provincial and federal budgets and Ontario’s election has focused more on affordability than jobs because there are more consumers than workers, in any society.

Many consumers, except the most vulnerable, are somewhat protected.

Federal benefits like the Canada Child Benefit and Old Age Security are indexed to inflation.

But the GST/HST credit is not fully indexed, and programs like the Canada Pension Plan and the Canada Workers Benefit is indexed but mostly driven by what you make.

Jobless benefits are simply based on what you had earned. Ontario’s benefits for social assistance and disability are not automatically indexed.

As a worker, the only inflation protection you have is your ability to negotiate more pay. That happens most often when you are starting a new job.

That’s why the wage growth in Canada is higher than in Europe and lower than in the U.S. Compared to the U.S., we saw relatively fewer people displaced from work due to the pandemic, but compared to Europe, relatively more people lost jobs.

Unionized workplaces are in a better position to negotiate increases, but for decades increases have been pegged at less than the rising cost of living, to prevent the dreaded wage-price spiral that bakes in inflation.

We’ve seen both wage growth and inflation accelerate everywhere, but in Canada average wages are only 3.3 per cent more than last year, whereas prices are 6.8 per cent higher.

In Ontario, average wages only increased by 2.3 per cent.

That means Ontario’s workers are losing more economic ground than elsewhere, even when labour markets are tight.

That’s bad for business, who need workers’ business.

If, as expected, Ontario’s voters return the Ford Conservatives to office this week, working for workers will need to be more than rhetorical.

With stagflation on the menu, expect a hot side dish of discontent served up, too.