PelhamToday received the following letter to the editor regarding the way inflation is measured in Canada:
I recently had the privilege of receiving a “Progress to date’ newsletter from my Federal Member of Parliament. It had a series of wins he had delivered for me (yes, I will take sole ownership of the representative, remember he has just sent me a note, rein in your jealousy!). What stood out prominently because I was coming from the grocery store with fewer goodies that I had planned, but what do you know here in the newsletter my MP proudly claimed that he had put his shoulder to the wheel and as you would have it managed to substantially reduce inflation. This is extraordinary.
Is this victory announcement deserved and honourable? If so, it maybe to the benefit of posterity to have our MP spend time with a popular local podcast. There is so much to discuss and understand and naturally a two-page A6 size newsletter will not do justice to the subject. Let’s start with the basics, how does this translate to the household level and is the worst past, can we relax and toast our away to merry-making?
In anticipation of the upcoming podcast, allow me to build a case from the opposing side, that way the discussion will be guided with context and observations which is necessary to extract the maximum value from this upcoming engagement.
Everyone worries about inflation because it strips away incomes from households, everything costs more, hence choices and sacrifices have to be made, and depending on the level of inflation this is easier said than done. For illustrative purposes we are going to use two products, a standard XXmls/grams of margarine and rental costs for a two bedroom apartment.
Pre-covid (2020) margarine was retailing for an average of CAD 6.00 across the major grocery outlets. Now in fall of 2024 it is priced at CAD 8.75 which is a 40% increase. Monthly rent on a two bedroom apartment was CAD 1,500, and this has moved to CAD 1,800 over the same period, which is a change of 20%. Over the same period incomes have barely moved by comparative margins, a 5% increase in income would be probably on the higher side.
Quite clearly the income effect of inflation is clear; the average household is worse off in 2024 than it was in 2020.
By now it should be apparent, the drop in inflation which is being promoted by most policy makers does not translate to anything significant, it’s a statistical computation which is devoid of relatable practical substance and here is why.
A drop in inflation only means that over a certain standardised period the rate of price change has slowed down compared to the prior period. Sticking with our margarine example this probably means that between Fall 2023 and Fall 2024 the price moved from CAD 8.50 to CAD 8.75. In other words, affordability is still getting worse but at a slower pace. Unfortunately, most of this information is propagated with the subtle undertone which says be optimistic, if by now you are not back to your old normal give it a bit of time, it's due to happen shortly.
In its worst extremes, it is an assault of how people experience reality and what the officialdom is trying to convince them to believe. Ignore the evidence of your wallet over here we are working pretty hard and things are happening, if you are not noticing anything you are looking in the wrong places or you are not putting any effort to change your circumstances.
How do you even measure this inflation which is going down? Who is responsible for this and are they accountable to anyone? For the fun of it, let’s start from the beginning: who and what caused this inflation? Under what authority and for whose benefit? What were their intentions and are there any consequences for this disastrous turn of events? Are these not fair and just questions for public office holders?
There is a lot to unravel and this may take a bit of time. In the meantime here is a suggestion, firstly to improve accountability, is it not prudent to agree on a simple and relatable index which requires minimum sophistication and is cheap to track, something that does not depend on an opaque and unrelatable bureaucratic system whose inner workings are beyond the comprehension of the average Jack and Jill?
How difficult can it be? Let’s agree on the attributes of the commodity/product which underlies our proposed index. It has to be consumed widely; its production and distribution must be immune to potential collusion and manipulation by monopolistic forces.
Here is a qualifier, this task is often easier to achieve in economies with a thriving and vibrant informal economy. Mainstream economists deride such economies on the grounds of tax leakages, which interesting because they are best and closest approximation to perfect capitalistic economy.
We will keep this as an ongoing project until we settle on the near perfect proxy, we are tempted to use milk and or eggs and or honey bought at the farm gate.
The inflation reduction goal becomes even more spurious when we attempt to investigate how and why we even moved into a high inflation territory in the first place. There are two possibilities here, we will try to offer both and then engage our Honourable MP and understand how they managed to control inflation through policy.
Inflation of itself is not a bad thing, it can actually be a useful indicator for policy makers and business people alike. Holding all things constant a money supply increase, input price shocks, and growth in demand may drive prices as people compete for the few goods and price is used as a rationing mechanism. In such circumstances the signal will be for businesses to expand production and to meet the growing needs.
It is necessary to understand what changes may have been made at a policy level to drive inflation. In many cases increased government spending is a precursor to high inflation plus a change in supply conditions due to natural disasters which lead to supply chain interruptions as was the case during Covid mania can restrict flow of goods thus forcing price to be used as a rationing instrument.
Both the above are held to be true of the preceding period which resulted in inflation, but the question is what action did the MP take to address inflation? We probably need to establish the probable contribution of all the competing variables, because in the same period we had a massive growth in government spending.
If government spending was the biggest inflation driver can the Honourable MP claim success for slowing down inflation? Let’s celebrate because I corrected (presumably) the problems I created by my own actions. Presumed because as proven before no one has been made better off, the opposite is true.
On the other hand, if it was down to supply shocks, one would posit that eventually the world got past Covid and most distribution channels and production facilities are back operating at their pre-2020 levels, if that is the case then what policy action was taken by the MP take to presumably reduce inflation or these are fortuitous circumstances?
On reflection either we are measuring the wrong things or we are measuring the correct things the wrong way, quite clearly reality as seen in shopping carts and baskets does not lend credence to inflation falling.
Which is why for the purposes of transparency, objectivity and accountability we would like to work on a new inflation index, and hopefully policy makers would adopt and accept it as a standard. I not then we have a yardstick for discussion and comparison. And may the best index win.
The current geopolitical landscape is fraught with many risks, driven in large party by emergence of new centres of influence and rearranging of influence and power. If we juxtapose the economic output of G8 economies against some of their partners in the G20, it is quite apparent that the world is changing. This transformation is bound to bring several challenges for domestic economies as they rethink their macro-economic management styles. Tariffs and protectionism seem to be making a comeback. All this put together will have serious implications for affordability as measured by inflation. Which is why we need an open and transparent discussion of what exactly we are talking about. I look forward to engaging with the Honourable MP.
Obrian Ruyimbe
Welland
