Eh Sayers Episode 12 - In a Movie About the Economy, Is Inflation the Bad Guy?

Release date: April 19, 2023

Catalogue number: 45200003
ISSN: 2816-2250

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StatCan's Consumer Price Index (CPI) tells us a lot about the economy… if you know what to look for. Guy Gellatly, Chief Economic Advisor at StatCan, joins us at the mic to break down the CPI and answer our questions about the economy. What's the ideal inflation rate? Is no inflation the best kind of inflation? And what is a deflationary spiral?


Tegan Bridge


Guy Gellatly

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Eh Sayers Episode 12 - In a Movie About the Economy, Is Inflation the Bad Guy? - Transcript

Tegan: Welcome to Eh Sayers, a podcast from Statistics Canada, where we meet the people behind the data and explore the stories behind the numbers. I'm your host, Tegan Bridge. Long-time listeners of the pod may recall that we released an episode about inflation and the consumer price index in January of 2022. At that point, the latest data told us that in December of 2021, the CPI was up 4.8% from the year before.

The last two years or so have been interesting. I'd like to show you a graph of the changes in the inflation rate over the past two years, but because graphs don't translate well to podcasting, Instead, this slide whistle will give you an idea of what the graph would look like.

At this point as of recording, the latest data released in February 2023 indicate that the year over year inflation rate was 5.2%, not the highest it's been in the last year, but definitely still up there. It's higher than it was a year earlier when we were also talking about how high inflation was. It got me wondering, What makes an inflation rate high in the sense of what's the ideal inflation rate?

My sister is doing a master's in economics, and I asked her if the ideal inflation rate was zero, and she just looked at me in horror. It was at that point that I realized we should probably do another episode about inflation, even if only so that I could impose upon another StatCan expert.

I want to know what the economists know. Ask my questions and get some answers. What's inflation and why does it, what's the word burn?

Thank you for joining us. Could you please introduce yourself with your name and job title?

Guy: Sure. it's Guy Gellatly. I'm the Chief Economic Advisor of the Analytical Studies unit here at the agency.

Tegan: So could you talk generally about the economy and inflation?

Guy: Well, we're coming out of extraordinary times, obviously with the, with the pandemic.

And, the last two years have seen a pretty continuous buildup in inflationary pressure, Sort of throughout different aspects of the economy. And, that's kind of provided the backdrop for, for sort of a lot of the, uh, the economic discussion. And certainly a lot of the reaction on the part of households and on the part of businesses is how, how to deal with and how to grapple with those, you know, the kind of high rates of inflation and what they mean ultimately for. Uh, for consumer spending and business investment and a whole host of other kind of economic activity.

Tegan: We are of course, dealing with a lot of inflation, and that causes people a lot of stress. So if I were to make a movie about the economy, would inflation be the bad guy?

Guy: Well, high inflation usually is the bad guy. There's no question about that.

I mean, the idea behind monetary policy and, for example, what the Bank of Canada attempts to do with its inflation targeting is to keep inflation, uh, low, uh, stable and predictable. And that's the idea of a 2% target. It's kind of that midpoint between the one to 3% control range that they have.

And so the idea there is you're giving confidence to, you know, households and investors who have to make decisions on spending and investing, and they want to be certain that the value of that money, their hard-earned money is, you know, is preserved over time. So, that's the idea, sort of stability and predictability, tends to be your friend there and in a high inflationary environment that can be very difficult to achieve.

Tegan: So I guess we know the cons definitely of inflation, but could you expand a little bit about those pros that you were talking about? Stability, predictability.

Guy: Well, that's the distinction between some inflation and high inflation. So you want some inflation, and that's the idea of, of that 2% target, you want to keep it kind of at or near, that midpoint of what the bank calls its control range.

So, the idea there is that you want, some inflation, some upward pressure on prices. It's sort of essential to a well-functioning economy. So, you know, you want something that's conducive to output growth and, and productivity growth and wage growth and job gains, and all of those, those good things that we like to talk about.

And, a stable, low inflationary environment and low inflation doesn't mean no inflation, and we can get to that at some point, but sort of a stable price growth there, is usually seen as very, very supportive of those goals. So that's the idea there.

Tegan: You say we're coming out of extraordinary times right now. For somebody who hasn't studied economics, where does our current inflation or, the inflation we've been seeing in the last year or so, how does that rank?

Guy: Well, certainly for those of us who are younger, and I'm not necessarily one of those anymore, it's the highest we've seen in some time. If you could go back to the early eighties, we did have double digit inflation there for a, for a period, and this was before the, uh, the inflation targeting, policies that the Bank adopted in the early nineties.

So, you know, we have had very high rates of inflation before. We're seeing this obviously for the first time in a, in a generation or a couple of generations, so there's a bit of a sticker shock to it. And the thing about the current inflationary environment is it's very, very broad based. So it's not just like, it's one thing. We often talk about gas price dynamics and their contribution to inflation.

But here you've got, you know, pressures coming from, you know, gas, food, shelter, a lot of consumer durables and consumer spending sort of, you know, strong price growth kind of across the board. And that's the, the challenge for many consumers.

Tegan: I don't think people need to be told the challenges of high inflation. It means people's money doesn't go as far when they want to make purchases, but what would happen if inflation were zero? Why would that not be ideal?

Guy: Well, the classic textbook response is a deflationary spiral. So the idea there is that if, if you, and here, expectations matter. So if people are convinced that, that you're going to see continual price decreases sustained over a long period of time, they're going to hold off their spending now. So there's a huge delay in their spending, and that can have real detrimental, uh, effects on the economy in the near term in terms of lower output and higher unemployment.

Tegan: So that would be if inflation we're going down. But what if it just, what if all prices just stayed the same?

Guy: That's the thing, you know, you, you're never going to be in a world where all prices are going to stay the same.

It's a, because these prices are reflective of demand and supply conditions in the economy. And those are always changing, you know? And, I mean, if you look at the experience of the last two years, you get an extent how rapidly that can change. You know, both on the demand side as, you know, we came out of the pandemic and people are ramping up their spending on, you know, as we were all trapped in our basements there. So there's a real demand to get out there and spend.

And, you know, much of the story of inflation over the last two years has been, you know, all the constraints on the supply side. It's just difficult to move things because of all of the disruptions and shortages in terms of computer chips and, and on and on. That created some real. Tensions on the supply side of the economy, and that too will flow into prices at some point.

So you've got upside pressure coming from high demand, some upside pressure on inflation coming from, from lower supply. And, uh, and that creates, uh, some of the rates that we've seen over the past year.

Tegan: And you used a rather scary term, deflationary spiral. Could you talk about what would happen if inflation were in the negative?

Guy: Oh, well then people, and again, you want, it's a question of being in the negative for a sustained period, and then people get convinced that, oh, okay, well why spend my money now if things are just gonna be cheaper down the road?

And so what you don't want to do is kind of lock into a psychology like that because then you know you're going to do potentially some real damage to the economy in the near term. People aren't gonna spend, if they're kind of convinced you're gonna get a better deal a month, two months, three months, and that actually leads to lower demand and lower prices.

And, so the spiral idea is what they want to avoid. So the idea here is, stability and predictability with some inflation that's broadly conducive to economic growth and, uh, and productivity and income growth.

Tegan: So let's talk about that ideal inflation rate. You said 2% earlier or one to 3%. Where does that come from? Yeah. And why is that the best number?

Guy: You know, that's, agreed upon. There's an inflation targeting agreement, that the Bank of Canada reviews with the government of Canada every five years and it's long been the kind of the, the target rate, the midpoint of that one to three range.

And, it's done in their judgment, obviously, the best rate for supporting the sort of economic activity and labour market activity that we'd, we'd like to see. So, you know, it is reviewed. There's no hard number that works for all time, although that target has been at 2% for quite a long time, both in Canada and in many other. Countries as well. The US Fed is common best example.

So yes, they certainly do review it, you know, that's the thing. It's not a mechanical thing where one size fits all for all time. They're gonna look at it periodically and determine kind of what that optimal rate is, at least in the near or the median term. And, uh, and they'll adjust their, their monetary policy according to kind of hit that mark, but 2%, as long as I can remember, has been that target. So slow, steady, predictable being the key idea there.

Tegan: Does every economy want a 2% inflation rate? And are there examples of economies that don't want a 2% inflation rate?  Is that a universal number?

Guy: You know, I don't know if it's a universal number. It is certainly a common number amongst much of the major central banks and monetary authorities, uh, in the Western world. It's just a, you see, to see that as, uh, as kind of the, uh, kind of the position that many of them will take.

Um, it, it'd be funny to look back historically and ask yourself sort of, you know, how you came to that sort of 2% world, and you know, what the evolution of monetary policy on the way to that actually looked like. But the idea here is, and this is a really important point, is you want to give, consumers, households, investors confidence that the value of their money is going to be preserved and, uh, by being very explicit about that target, and giving some, some real time information on how they see the economy evolving over the near term. It gives you a great deal of confidence as a, as someone who, who now has to spend money. It's like, okay, is this a sensible thing to do? Do I have confidence that inflation is going to come back down to that range?

And so the central banks, both here and abroad will, will give lots of signals often to kind of communicate their expectations to you and I, and then, it's obviously good for the economy as a whole.

Tegan: If someone would like to learn more about inflation, where can they go?

Guy: Um, first of all, you can go to Statistics Canada's website, uh, the Consumer Price Index that comes out monthly. It's the headline inflation indicator.

And, there's a whole bunch of supporting analytical work, that's been produced over time by the Consumer prices division and others in the agency that help us understand the dynamics of inflation and, what's driving it and what some of the key measurement issues are. That's a good place to start for sure.

The Bank of Canada as well, if your interest is in inflation targeting and how that works and how monetary policy, is conducted to ensure you know that, that the economy functions on an effective, and a solid foundation. That's the place to go there. They have a number of documents where they outline sort of how they think about this and, and the tools at their disposal.

Tegan: Perfect. Thank you so much.

Guy: Thank you.

Tegan: You've been listening to Eh Sayers. Thank you to our guest Guy Gellatly. You can subscribe to this show wherever you get your podcasts. There you can also find the French version of our show called Hé-coutez bien! If you liked this show, please rate, review, and subscribe. This is the last episode of season three, so we'd like to take the opportunity to put the spotlight on the many people who contributed behind the scenes.

Thanks to the subject matter experts of StatCan and the many, many other internal teams who support this show. Special thank you to Tom Thompson for his invaluable guidance. Production support by Janelle Bah and Gillian Bridge. The video production team is Tony Colasante, Martin Charlebois, Jesse James McCutchen, and Mitch Lawson. Audio engineering by Max Zimmerman. The logo was created by Vincenzo Germano. Thank you to Annik Lepage and Marc Bazinet for steering this ship. My name's Tegan Bridge and I've been your host and thanks to you for listening.


Statistics Canada. “The Daily — Consumer Price Index, February 2023.” Government of Canada, March 21, 2023. Consumer Price Index, February 2023.