Has Inflation Gone Crazy?

Blog header inflation gone crazy

No, you aren’t going crazy.

Everything is getting more expensive. Houses, stocks, cars, food, you name it.

Except one thing isn’t keeping up…

 

Inflation showing assets increasing

 

Wages.

 

Generally speaking, the goal of a country or society is to raise the standard of living of all participants. What this means is over time you should be able to achieve more, have more, or do more than you would have been able to in the past.

 

So what happens when the price of everything goes up, but our ability to afford it doesn’t go up at the same rate? Well it basically means we can afford less than we used to. In other words, our standard of living has decreased.

 

You see, inflation and standards of living are generally controlled, or at least attempted to be controlled through what is known as fiscal policy and monetary policy.

 

Fiscal policy is the result of actions of members of parliament. In other words, its what all of the people you vote for end up voting for. You would hope that the people you vote for try to increase your standard of living, though let’s be real. That is very clearly not the case no matter which side of the political aisle you sit on.

 

 

Monetary policy is the result of the actions of the central bank. This is often the boogeyman in a lot of conspiracy theories. Basically the central bank regulates banks, and sets interest rates. This drives the demand and supply of money in the economy. Which is generally one of the best tools we have to manage inflation expectations.

 

The problem right now is twofold. First, the central bank only has a mandate to try to target inflation. The problem with this is that the version of inflation both the central bank and politicians refer to only has a roughly 30% weighting to the cost of housing. Why does that matter? Well recent data shows the average Canadian is spending 52% of their income to buy a house. I know this doesn’t factor in rent, but lets be realistic. If someone is spending 52% of their income to buy a house and rent it to you, you can bet they are jacking those rental prices up. In other words, our current inflation metric fails drastically to appropriately measure the impact house prices have on the ordinary Canadian.

 

 

The second problem is politicians are aware of this. However, it is easier for them to point to the standard inflation numbers and insist there is nothing wrong. Housing is a cash cow – and any attempts to tinker with it or bring down the prices will highly likely result in a recession. If they bring prices down too much too fast, it could easily spiral into a replica of the 2008/2009 housing crash the USA faced. For now, every politician who has held power in the last 20 years has preferred to kick the can down the road.

 

 

Headline inflation is running at 3.7% in July 2021. Economists and central bankers are quick to point out that this is likely transitory – in other words they expect that it is a short blip due to held back demand and supply chain bottlenecks created by the still ongoing pandemic. Only time will tell if they are correct.

 

When your wages are only going up 2% per year, or even decreasing due to layoffs, it sure feels like you are falling behind. When the true cost of living in this country continues to grossly outpace the rate of wage increases, Canadians end up falling further and further behind.

 

Now I’m not one to tell you how to vote. Well publicly that is. However, in this election, I strongly suggest you consider a candidate who makes tackling the rising cost of living and stagnant wages in this country one of their main priorities. Unfortunately, I can tell you from experience as someone who has voted across the spectrum, when it comes to politicians, none of them will have the spine to do a thing about it until it’s way too late and we’ll continue to vote for them anyways.