The inflation war is over – here, south of the border and across the pond, too.Sean Kilpatrick/The Canadian Press
Afraid of an inflation reawakening? While the rise in Canada’s headline Consumer Price Index looks tame, “core” inflation measures are hotter, at around 3 per cent. Same in the United States. Britain’s headline price index rose 3.8 per cent in July. Many believe tariff tumult means worse awaits – maybe even another rate hike spree like 2022-23.
Wrong! The inflation war is over – here, south of the border and across the pond, too. Let me explain.
It is human to fight the last war – in this case, recent years’ nosebleed inflation. Canada’s headline CPI sits 20.9 per cent above December, 2019, levels. America’s is up 25.7 per cent. Britain’s? Even worse – up 27.9 per cent. Ouch!
The CPI also understates many people’s experience – maybe yours. Hence, inflation angst is understandable. But when wars end, their destruction isn’t magically reversed. Peace just stops new destruction. Same with inflation. Remember: Prices and inflation are different. Inflation is the speed of changing prices – now 1.7 per cent year-over-year in Canada and 2.7 per cent in the U.S., based on CPI. Prices overall rarely fall. Select categories may, but broadly falling prices, or deflation, almost never occurs. Thank goodness for that.
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Why? Real, deep deflation means depression – a far deadlier foe than inflation. Reversing the CPI’s rise after the pandemic means approximating 1929–1933’s deflation or the early 1920s’ downturn. Falling prices sound nice, but amid such deflation consumers put off buying anything non-essential, expecting prices to fall further. Demand vanishes. Economies collapse. Suffering skyrockets disastrously!
Winning the inflation war was never about dropping prices, just slowing their rise. Governments won’t ever seek zero inflation. Why? Inflation is their friend. If inflation runs near the Bank of Canada’s and U.S. Federal Reserve’s 2-per-cent annual targets, repaying existing debt – close to $1.3-trillion in Canada and US$37 trillion in America – gets about $26-billion and US$750-billion cheaper, respectively, each and every year ahead. That’s because inflation essentially devalues debt by making dollars in the future cheaper.
Canada’s year-over-year headline inflation rate of 1.7 per cent in June pales against its most recent peak of 8.1 per cent in June, 2022, and is in line with the BoC’s target. In the U.S., since peaking at 9.1 per cent in June, 2022, CPI cooled to July’s 2.7 per cent. That’s above the Fed’s target (which isn’t based on CPI, for the record), but hardly indicates galloping prices. These measures aren’t very exact anyway. And no evidence exists – none, zero, zip – that central banks can fine-tune anything precisely. Take the win. The “war” is over.
Tariffs? Yes, I have said they are bad economically and will ultimately be paid by American consumers – tariffs always hurt the imposing country most. But tariffs on select items differ from inflation. Inflation is a broad price increase across the entire economy. It is solely and simply too much money chasing too few goods and services. Only central banks cause true inflation.
Consider: During 2020’s COVID chaos, central bankers inexplicably and bizarrely ballooned the total quantity of money. The BoC boosted M2++, which is Canada’s flagship gauge of the country’s money supply, by over 14 per cent in February, 2021, from the year earlier. Meanwhile, U.S. M4 – a similar measure – soared much more: 30.9 per cent in June, 2020, from a year earlier. Later, prices galloped.
Now? Canadian M2++ is up 6.4 per cent from the previous year and US M4 is up 4.1 per cent – in line with the low inflation of the prepandemic years. Minimal inflation fuel.
Tariffs don’t affect money supply. Period. They may make some prices rise, but any impact would be small and isolated, encouraging substitution or replacement, and making some other prices fall. Remember President Donald Trump’s much-hyped first-term tariffs? Monthly U.S. year-over-year inflation never even reached 3 per cent.
Boosting some prices just forces others to fall. For example, with the same amount of money circulating, tariffs on essentials leaves consumers with less money for non-essentials, so demand and prices for them fall. And 2025’s tariffs are far from “universal.” Companies find ways – legal and illegal – to skirt tariffs, as I’ve written before. But exemptions abound, too. Over half of U.S. imports are fully tariff-free, including the huge majority of Canadian shipments.
Also, most global economic activity is services. Take America, the country that tariffs should hit hardest. Services make up more than 60 per cent of its CPI basket. That chunk is largely insulated from tariffs. Other major components, such as energy (6.5 per cent of the CPI basket), include tariff exemptions and aren’t import-reliant. Yes, automobiles (4.3 per cent) got hit hard. But most other heavily tariffed categories are economically tiny. Coffee, among the highest hit, is 0.1 per cent of the CPI basket, apparel 2.5 per cent, prescription drugs 0.9 per cent and cosmetics 0.3 per cent.
That doesn’t mean these weights reflect your budget. Or that it isn’t painful if the price of your orange juice or the car you crave rises. But individual CPI categories always wiggle. That isn’t inflation. It is the normal movement of prices to govern supply and demand.
Market forecasting requires seeing something big others don’t. Fighting the last war won’t help with that. The inflation war ended, full stop. Cheer it – and stay bullish.
Ken Fisher is the founder, executive chair and co-chief investment officer of Fisher Investments.