BRAUN: Inflation spike temporary but labour shortage becoming a real concern

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This just in: The sky may not be falling.

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As economists everywhere duke it out over what happens next with inflation, consumers can expect another year of sticker shock for food and fuel as demand soars and supply chain woes continue.

And it seems safe to anticipate the central bank will hike rates fairly early in 2022.

It’s all a bit brutal at the moment.

But as Bank of Canada governor Tiff Macklem keeps repeating, these recent inflationary pressures are going to ease up.

Inflation is expected to come back down to around the 2% target by the end of next year; it will remain higher longer than expected, but not much longer.

Much of it is pandemic related and therefore temporary.

That’s not to downplay the situation. Inflation rose to 4.7% in October, a high not seen since 2003, and most Canadians have felt the sting when cashing out at the grocery store.   The numbers are expected to rise again and may hit 5% before the end of the year.

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Nonetheless, Macklem said in a recent statement: “The Bank of Canada is committed to ensuring that price increases don’t become ongoing inflation.”

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So yes, inflation will depart eventually, “but fear-mongering isn’t going away,” said one financial wag, who preferred not to be identified.

Jokes aside, there is a dangerous element of self-fulfilling prophecy to inflation.

Henry Curr, economics editor for The Economist, has pointed out that inflation is tied to people’s expectations, particularly whether or not people believe it will get out of hand.

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“If people don’t think inflation is going to happen, then it won’t, for the most part,” he said.

How that works is the creation of a wage/price spiral, as the Financial Post explained recently, “whereby workers start demanding higher wages and suppliers begin raising prices in anticipation of permanently higher costs.”

The media also plays a role in that.

Douglas Porter, chief economist at BMO Financial Group, said in a recent statement that the current vogue in financial writing about inflation is to harken back “to the unfashionable 1970s,” the era of the last great inflation — and that’s misleading.

We apologize, but this video has failed to load.

Soaring, double-digit inflation — up to 14% by 1980 — and high unemployment distinguished that period; Porter is quick to dispense with those comparisons.

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“The main point is that we are not pre-destined to follow the pattern of any prior episode, because each has its own unique underpinnings,” he said.

And yes, though things will remain wild and wooly through 2022, moderation will be on the books “by the back half of next year,” according to Porter.

Our anonymous financial wag explained some of the unique underpinnings of the 1970s, listing the oil crisis, Nixon abandoning the gold standard, and huge waves of Baby Boomers entering the work force for the first time and wielding their discretionary income.

Inflation is real, and it’s here, he said, but it’s not long-term.

“Everything has a cycle. And there are far more checks and balances on fiscal policy than in the 1970s.”

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We apologize, but this video has failed to load.

So yes, everyday costs are rising and it’s tougher to make ends meet, but that’s not permanent.

If you want to worry about something, worry about labour shortages. The pandemic has changed a lot of people’s minds about what they do — or did — for a living.

Wendy Edelberg, senior fellow in Economic Studies at the Brookings Institution, states the big risk in all this is that large increases in demand for workers in the services sector will not be met by equally large increases in labour supply.

But that can be helped by policymakers, she stated, who can encourage labour supply, “by continuing to get the pandemic under control through vaccinations and sensible health policies.”

And policymakers can also remove barriers that make work costly, “such as lack of access to affordable, high-quality childcare.”

lbraunb@postmedia.com

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