The economy is being held together with financial duct tape right now, but people are starting to worry about inflation.
Inflation fears arise from massive government spending to support the economy through the pandemic. Inflation would be a risk if the economy rebounded strongly while all that government money was sloshing around the financial system.
A more likely outcome is a slow recovery where inflation remains subdued. Think of how modestly the economy has performed over the past decade, and then dial back growth a little further.
Inflation is largely unknown to anyone who wasn’t an adult during the 1980s and early 1990s. The inflation rate hit low double digits in the early 1980s and then topped 6 per cent in the early 1990s. Since 1995, the inflation rate has averaged 1.8 per cent.
Concern about inflation last peaked in 2008-09, as governments responded to the global financial crisis by pouring money into the economy. But inflation never became an issue. If anything, economic growth disappointed in the past decade.
Demographics help explain slower growth both in the past decade and the one ahead. Aging populations aren’t as economic productive, and that keeps a lid on both economic growth and inflation. In the pandemic, we have other factors working against inflation as well.
The unemployment rate in Canada soared to 13 per cent in April and would have been 17.8 per cent if we counted people who worked recently and want to work, but were not actively seeking a job. Wage increases are usually a big component of inflation – but how can wages surge when there’s so much unemployment?
Most of the people who lost jobs as a result of the pandemic have been temporarily laid off. But the plan to gradually phase out physical distancing suggests people won’t be called back to work en masse. Expect some to never return as their employers look to cut costs.
Have you noticed price hikes in stores? “ … No one should make the mistake of extrapolating price increases for a few items, such as toilet paper or sanitary wipes, for broader inflation,” investing blogger and money manager Barry Ritholtz wrote in a column for Bloomberg News.
Mr. Ritholtz also addresses concerns about government spending. It “doesn’t make up for the earnings power that’s been destroyed,” he writes.
In theory, inflation is a worry when governments pour money into the economy like they’re doing now. In the COVID-19 world, inflation is like your family car. For the time being, it’s parked.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, May 14, 2020