Jack Mintz: Past inflation is politicians' biggest present problem (2024)

Governments and central banks are clearly winning the war against inflation, which is falling in most countries. Yet the high cost of living dominates polls in many places and politicians are taking heat for it from their electorates. Ask India’s Prime Minister Narendra Modi, who, despite winning re-election, lost his parliamentary majority as voters turned against his government over bread-and-butter issues. Or check with U.S. President Joe Biden and the U.K.’s hapless Prime Minister Rishi Sunak, both seeking re-election and both mired in poor polling as voters are angry over inflation and their handling of the economy.

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As of April, year-over-year inflation had fallen to 2.9 per cent in the G7 countries. That sounds good compared with its peak of 7.1 per cent in 2022, right? Maybe not. The public is concerned about the cumulative change in prices since the pandemic, not just the latest inflation rate. People are not yet ready to credit governments for success in reducing inflation.

Call it the Great Disconnect between policy-makers and voters. When central bankers make a decision to increase or cut interest rates, they quite correctly focus on current inflationary trends. Because inflation has fallen and GDP growth is slowing, the Bank of Canada cut the bank policy rate by 0.25 percentage points on Wednesday, the first cut in four years and ample reason to cheer. On the other hand, interest rates are still much higher than five years ago.

So why are voters so unforgiving? I can think of four reasons: incomes are failing to keep up with the loss in purchasing power; interest rates have made borrowers much worse off; taxes are rising; and the economy is weakening.

The first effect is simple: Prices have risen so much since January 2021 that incomes have not kept up. In the U.S., consumer prices have risen 19.4 per cent, hourly wages only 17.3 per cent. True, wages have risen faster than prices in the past year, but because real wages fell two per cent in the past three and a half years Americans are still behind the eight ball.

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And it’s worse in Canada. Since January 2021, hourly wages including overtime have risen only 9.8 per cent. But consumer prices are up 15.6 per cent, food prices 20.8 per cent and gas 41.4 per cent, thanks in part to higher carbon taxes. Shelter costs are up by 21.2 per cent as housing prices and mortgage payments have soared. All this means workers’ incomes don’t go as far as they did.

Making matters worse, central banks have had to raise interest rates. At the beginning of 2001 you could get a three-year mortgage at 3.49 per cent. Before Wednesday’s announcement, the same three-year mortgage rate was 6.99 per cent. For each $100,000 needed to finance a home, the monthly payment has risen $200.

Rising interest rates also contribute to higher shelter costs, which account for almost a third of the consumer price index. Auto leases, credit charges and student loans are also more expensive, putting financial pressure on millions of Canadians who borrow from banks and other lenders.

Taxes are also hitting Canadians’ purchasing power. Personal, corporate and excise taxes have all been hiked. User fees have risen, as well. From 2019 to 2022, the Fraser Institute estimates, the average Canadian family’s tax bill rose $4,421 (in 2022 dollars). With out-of-control public spending and yawning deficits, Canadians should expect an even bigger tax bill in future.

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They might find some relief if their wages rose faster, interest rates were cut much more and governments demonstrated fiscal prudence to avoid growth-killing taxation. But don’t hold your breath on all that. Unemployment is rising to over six per cent and the outlook for productivity is weak. Workers bargaining for higher wages to make up for past inflation will find the economy is less able to support a higher standard of living.

No wonder voters are in a sour mood. They feel let down by governments whose policies make the rich even richer via lavish green and business subsidies. Over-sized bureaucracies are failing to deliver good public services. People wait in line for emergency care and doctor appointments, watch their children go to schools with slipping standards, witness rising crime in subways and streets and fork over cash to pay higher energy and food costs.

Is there an answer to this malaise? Yes, certainly. If people want to earn higher wages to make up for inflationary losses, they need a more productive business sector that generates incomes and jobs for Canadians and a slimmer, more effective government. Maybe the wind is shifting as political leaders recognize that Canadian voters prefer fiscal prudence and economic growth with a social safety net to help the poor. That is the Canadian spirit.

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