What goes up must come down. Here’s why the same will be true of inflation.

This column by Armine Yalnizyan was originally published by the Toronto Star on Wednesday March 23, 2022. Armine is a Contributing Columnist to Toronto Star Business featured bi-weekly.

Inflation is on everyone’s mind, with price increases broadening and escalating while wage growth remains far behind.

That’s a familiar story, but what’s spooking everyone is that, after seven months of inflation in excess of 4 per cent, the pattern of escalation shows no signs of abating. In fact, last month inflation hit 5.7 per cent, the fastest pace of year-over-year price escalation since August 1991.

But what’s happening now is not remotely comparable to what happened 30 years ago, when we were amidst a made-in-Canada recession due to the central bank’s insistence on “wrestling inflation to the ground,” and unemployment was double the current rate.

Today’s price spikes originate with holdups in production and delivery due to the first global pandemic in more than a century, which — try as we might to dismiss — we are still not through. Now spillover effects from a war are compounding these effects globally.

China imposed lockdowns on millions of its citizens again just a few days ago, after the Olympics ended, because of a predictable spike in COVID-19 cases. Less production in those factories will reduce worldwide supply of inputs for cars and computers, and finished goods like electronics, clothes and furniture.

The invasion of Ukraine by Russia threatens a quarter of the world’s wheat and barley exports, and more than a third of the world’s main source of fertilizer (potash). The world is about to get very hungry.

For months to come, we’ll all pay more for just about everything. Is there an end in sight? Yes, but the solutions won’t come from where you might think, or as fast as you’d like.

The traditional tools for dealing with inflation are central banks raising interest rates, and governments cutting back. They both aim to reduce demand so that an overheated market, typified by inflation, can cool down. Today the general dynamic is the same — too much money chasing too few goods, causing prices to rise. But the problem is not that the economy needs to cool down. Squeezing demand now will just cut back whatever rebound we were experiencing.

Central banks around the world, including Canada, will nudge up interest rates because their main job is not just to control the pace of inflation; it’s also to control inflation expectations, which can bake in even more inflation.

Given so much of this bout of inflation can’t be avoided due to pandemic and war, central banks everywhere will be walking a tightrope between cooling demand and avoiding recession. But actions that prevent things from getting out of hand can quickly make things worse.

Raising interest rates may subdue speculation in the housing market, and take some steam out of an asset bubble that led to soaring housing prices and rents. By the same token, higher rates make it more expensive to build more housing, and will add costs to the production of gas and food prices. Higher rates may lead to businesses hiring fewer people, making it harder for a growing number of people to pay for the basics.

Policy solutions for the short run are limited, but one measure is already making a difference in some parts of Canada and for some households: the Early Learning and Child Care Agreements will put thousands of dollars into the pockets of families with young children. That is, everywhere but in Ontario, the only government that has yet to sign a deal with the feds. For many families that will more than offset rising prices.

But what will make those prices fall?

Market forces, which governments mostly don’t control (an exception being the reviled wage and price controls of the 1970s). Take gas prices. In my part of Canada the price at the pump dropped 20 cents a litre since its peak earlier this month, as global supply increased by OPEC nations. (Check out the evolution of prices where you live since March 10, the most recent peak, here.) We talk about rising prices, but falling prices rarely make the news.

Our inflation shock is driven by supply constraints, not overdemand. Once we’re through the pandemic, and if we avoid the catastrophe of a global war, we could see price increases fall back to pretty stable rates, as they did for most of the past 20 years.

Meanwhile wage growth could accelerate due to labour shortages. The unemployment rate was 5.5 per cent last month, same as in the summer of 2019, a level last seen in 1973 and 1974. That’s another big difference between now and August 1991, when unemployment was 10.5 per cent. We are not recreating stagflation.

We only have a quarter century’s worth of data tracking the relationship between inflation and wage growth, and it clearly shows the two don’t really follow each other. In fact, more often than not, average hourly wages fell year over year — mostly due to the changing composition of wages, not because people’s wages were falling. That comes from the more rapid growth of jobs in sectors that are poorly paid.

Nobody knows what conditions will shape future production, and consequently prices. That will depend on how much nations opt for self-reliance or mutual dependence in production; how climate change affects the location of production and shipping; and how trends in global capital investment and adoption of technology evolve. And many decision-makers have become accustomed to raspberries in January and other joys of a global market, so the idea of less trade seems more likely rhetorical than a real possibility.

As for wage growth: there are no guarantees wages will grow, or for whom. The 3.1 per cent growth in average hourly wages last month doesn’t tell if both bosses and the lowest-paid saw an equal increase. Even if they did, a manager earning $300,000 a year would get 10 times as much ($4.65 an hour more) more than a minimum wage worker (46.5 cents) in Ontario. It seems highly unlikely that wages won’t respond to widespread labour shortages caused by population aging, not just in Canada but throughout the global north. Given a bigger cohort of seniors on fixed incomes, growing purchasing power may be resisted in forms that could contribute to price inflation, like wage growth; but more affordable, publicly insured services (like child care today, and possibly pharmacare and dental care tomorrow) also put money in your pocket.

In short, things seem to be veering toward the unmanageable now. But we will get past the pandemic, and if we avoid the potential long-term global catastrophe of triggering a third world war, stable prices and improved purchasing power is possible. Just don’t expect it to be served up tomorrow.