The pandemic drove up inflation. How come, years later, we're still paying more?

Calgary Herald

7 days ago

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A new report from the C.D. Howe Institute concluded that the Trudeau government's spending splurges played a major role in fuelling inflation during the pandemic. The report pointed the finger at Ottawa's unfunded spending spree — more than the Bank of Canada's monetary policies — that acted as 'helicopter drops' of money for the private sector.
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In 2020, about 20.7 million Canadians out of an adult population of 30.3 million received income from one of the federal pandemic-related programs, according to a 2022 report. During that year alone, the programs are estimated to have cost $270 billion — about 12.5 per cent of Canada's gross domestic product (GDP) — and cumulatively have cost about $360 billion to date.
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While the programs broadly succeeded in providing relief to individuals and businesses and creating a cushion for the economy during a crisis, the C.D. Howe Institute noted that injecting that much extra money into an economy while unemployment is low results in inflation.
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David Andolfatto, chair of the department of economics at the University of Miami and an international fellow at the C.D. Howe Institute, said inflation should be expected when governments add that much extra demand to the economy. 'Of course prices went up,' he said. 'There's no such thing as a free lunch. Somebody will have to pay.'
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And not only do consumers pay higher prices but they must then pay again with the higher interest rates the central bank then implemented to try bringing those prices back down. In 2020, interest rates were down to 0.25 per cent as the Bank of Canada aimed to cushion the blow from the pandemic; by 2023, the rate had risen 20-fold, to five per cent.
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Jean-Francois Perrault, chief economist at the Bank of Nova Scotia, estimated in a November 2023 report that government spending and pandemic-era transfers to Canadians were responsible for about 42 per cent (200 of the 475 basis points) of the increase in the Bank of Canada's prime interest rate during that period. About one-third of those interest rate hikes can be traced back to provincial governments, he calculated.
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Since the start of 2023, inflation has remained at less than four per cent, just over the Bank of Canada's preferred band of between one and three per cent, but a big decrease from the peak of pandemic-era inflation.
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And, at least for now, it's largely under control. Statistics Canada reported last week that Canada's inflation rate accelerated to 1.9 per cent in June, up from 1.7 per cent the previous month.
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Why have some prices kept rising since the pandemic?
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When the pandemic subsided, it removed a number of shocks and disruptions to markets. But not all of them.
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The Russian invasion of Ukraine, for example, still hasn't been resolved. Many of the people who started working from home during the pandemic still do so, either part-time or full-time, which puts a little more money in most of their pockets. The glut of baby boomers is also at the stage of life where many are retiring, having saved up their money, and now want to spend it.