The big questions these days is: Is inflation here to stay or just with us for a short visit?
Allowed to continue unabated, inflation will cure itself by creating a lengthy, painful recession that hurts much of the population. Since the end of the Second World War government has assumed the role of managing the economy to maintain jobs, grow the economy and keep inflation low.
Inflation beyond two per cent a year is like a cancer gradually eating away, killing a few jobs, a few small businesses.
It can get out of control like South American banana republics or the 1970s when high interest rates killed inflation as well as a lot of people’s hopes and home ownership.
So, the other big questions is: How to stop inflation?
Back in the 1980s when interest rates on bank loans were 18 per cent my father’s banker asked him: “Benny what are we going to do about these interest rates?’’
My father, a farmer with modest formal education, shot back: “Stop borrowing your fricken’ money!”
I may be biased but I think my father hit the nail on the head.
If consumers and government stopped spending so much on stuff they want but don’t need we would have little inflation.
Basically inflation is made up of two factors: too much money chasing a short supply of goods; and powerful sectors (business or unions) pushing up prices because they can.
Our current inflation became noticeable about two years ago. A friend pointed out the package of cheese slices he buys went to 14 slices from 16 slices. No price reduction.
Much of the inflation has been blamed on COVID-19. Much of those excuses are bull crap.
The cheese inflation my friend noticed was the result of corporations trying to fatten their profit margins by sneaky means.
COVID did slow down production from meat packing plants in Canada to factories in Asia and slower delivery from ports.
Once the first waves were over and people began to buy stuff with all the money they couldn’t spend while in lockdown the shortage of stuff to buy appeared. Inflation began to eat at value.
New cars and old car prices shot up because there weren’t enough computer chips. The same happened wherever computing chips are used.
Ocean shipping rates went sky high as ships rationed their holds and available containers to the highest bidder. The Baltic index for bulk shipping containers went from $1,400US per container in March 2021 to $10,323 in September last year — an increase of 730 per cent — since settling to $8,800.
Compounding that was a decline in new ship orders caused by a rate decline a few years ago.
The remedy will come from new ship buildings. Companies are piling up the orders with current rates. It takes three years to build a new vessel and really pop the rate balloon, although some rates ate coming down a bit.
Shipping rates are a big source of inflated costs. A $1,000 increase in shipping adds $2,000 to the price for the distributor/processor. At the retail level that adds another $2,000 to the price.
Getting enough product out to satisfy buyers without having to ration it by raising prices is the key. Making products takes labour.
Labour is in short supply. The pandemic got a lot of people thinking about their values, family and future occupation.
In the United States 4.5 million people quit their jobs — equivalent to 2.7 per cent of the labour force. That created labour shortages across the country.
Bidding up the price of labour to attract employees is standard practice and an underlying cause of continued inflation.
Inflation will be with us for a long time unless we stop buying all the non-essentials we think we need.
Ron Walter can be reached at ronjoy@sasktel.net
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
