Inflation | The National Bank does not believe in price controls

In a special study, economists at the National Bank conclude that the introduction of price and wage controls would be ineffective in the long-term fight against inflation.

Posted at 5:00 am

Andre Dubuc

Andre Dubuc
The press

The measure was passed in the 1970s with mixed success, which does not prevent it from being called for again in 2022.

“Would controlling wages and prices be a solution? We don’t think so, writes Stéfane Marion’s team of economists. Rather than lapsing into populist measures that would only temporarily contain inflation, the authorities should instead adopt responsible monetary and fiscal policies aimed at curbing inflationary pressures and use the ammunition at their disposal to create conditions that promote inflation in their economy,” is the conclusion of the study published on Monday.

In Canada, when inflation topped 10% in October 1975, a three-year anti-inflation program consisting of price and wage controls was introduced, the bank recalls. Result at the end of the process: The 12-month variations of the consumer price index (CPI) for the years 1977 to 1980 were 9.4%, 8.6%, 9.8% and 11.1%, respectively.

Strict measures create temporary relief at best and risk being abandoned quickly, the financial institution argues, drawing on historical lessons.

“Don’t factor in high inflation in wages”

Coincidentally, the National Bank’s study was released days after the Bank of Canada governor came out and advised SME owners to limit wage increases to their employees to avoid fueling an inflationary spiral.

Entrepreneurs across the country are scrambling to find work in an environment where job vacancies are nearly 225,000 in Quebec and 900,000 in Canada.

“And my only advice is that the high inflation we’re seeing today isn’t there forever. So if you commit to long-term or wage contracts, don’t expect inflation to stay at current levels. You should expect a drop,” Tiff Macklem said in a webinar hosted by the Canadian Federation of Independent Business (CFIB). The transcript of the event has been available since Friday.


BLAIR GABLE PHOTO, REUTERS ARCHIVE

Tiff Macklem, Governor of the Bank of Canada

“As a company, don’t expect the current inflation rate to stay at this level for long. Don’t build that into long-term contracts. Don’t factor it into wages,” he continued.

“What is really keeping us awake is the risk that businesses and households will start to believe that the high inflation we are currently experiencing is here to stay. If that happens, when high inflation sets in, it will be much more difficult to bring it down. »

An inflationary spiral begins when companies raise wages to attract and retain workers, and then pass the rising costs on to consumers, who then demand higher wages to offset inflation.

The Bank of Canada surprised markets last week by raising its interest rate by a percentage point from 1.50% to 2.50%.

This decision is in response to accelerating inflation in the country. Gov. Macklem now says he expects CPI growth of over 8% in June and over the next few months. In May the change was 7.7%. In the United States, the comparable figure for June was 9.1%.

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