Where’s the inflation?

From the October 2020 print edition

As I write in mid-September it’s hard to know how the economy is doing. There has been a partial recovery since the precipitous drop in spring, when virtually everything except essential services was brought to a grinding halt. In both the US and Canada, governments provided fiscal stimulus that would have been unimaginable nine months ago. Canada will run a deficit this year that is projected to be $343 billion, up from $20 billion a year ago. That is an astonishing increase. One way to wrap your head around it: every man, woman and child has been given $10,000 this year for doing nothing.

’m not here to criticize this public policy decision. I have and will continue to criticize the decision to shut down the economy for as long as it was. We were told that the shutdown was to “flatten the curve.” Once it was flattened – which was in late April – there should have been a more concerted effort to open up, allowing each individual to assess his or her willingness to take the risk that they would contract COVID-19. Given that this wasn’t an option, the government had little choice but to print money and pay many of us just for being Canadian.

This was common public policy in many of the developed countries of the world. If you agree with Milton Friedman (and this one is hard to dispute) that inflation is a monetary phenomenon, then we will be seeing some sort of inflation sooner or later. What Friedman argued is both reasonable and intuitive: if the output in an economy does not increase, but more money is printed, then natural market forces mean that at least some prices will go up. It is very difficult to argue with that logic.

Basket of goods
We aren’t seeing inflation yet, at least not as measured by the Consumer Price Index. The latest reading we have is for the end of July and over the past year. The basket of goods and services tracked by Statistics Canada has risen by a miniscule .1 per cent. That means that if a year ago everything in the basket would have cost you $1,000, it would now take $1,001 to buy that same bundle of stuff. It is true that if you exclude gasoline, then it’s $1,007, but this is still an almost invisible increase.

The fact that we don’t seem to have seen much general inflation yet doesn’t mean that no prices have gone up. I’m going to draw on admittedly anecdotal evidence to make this point. When the pandemic began, I started grocery shopping more regularly than

I had in many years, and I paid closer attention to prices. Back in March, when I went to my local No Frills grocery store, I could buy No Name potato chips for $.99 a bag and I think I was paying about $2.40 for a dozen eggs. Today the potato chips still sell for $.99, but now the eggs are more expensive.

And this is where much of the inflation will reside. The prices of what are understood as “normal” goods will get bid up, while “inferior” goods (and I put potato chips in this category) will remain at the same price. Therefore, the inflation that we will experience, at least in the food category, will result in an almost imperceptible erosion in our quality of life.

Yet at the same time, there will be powerful anti-inflationary forces at work. Labour markets
in North America will be slack, likely for an extended period of time as we struggle to get back to something approximating full employment.

Then there’s the China card. The country remains generally opaque to Westerners. However, from what I understand, a key concern of the ruling classes is full employment. Idle hands, after all, are the Devil’s workshop. My guess is that Chinese public policy will be oriented towards keeping everyone working and the best way to accomplish this is to offer low prices to the rest of the world. This will also be anti-inflationary. The bottom line is that I don’t see significant inflation returning any time soon, at least as reflected in the Consumer Price Index.

So where will the inflation be? I think we’ve already seen evidence of that phenomenon with the performance of the US stock market. But where I think that asset inflation is really going to take hold over the next decade will be in real estate prices. Mark Twain famously said of land: “They’re not making it anymore!” Given that everyone needs to live somewhere and given the favourable tax treatment given to one’s primary residence, I’m betting that residential real estate will be where all that money that is being printed will (pun intended) find a home.

Toronto-based Michael Hlinka provides business commentary to CBC Radio One and a column syndicated across the CBC network.