The economic sequel no one ever wanted is here.
Inflation, Part Two is now in theatres, set for a long run. As we fight a trade war, a financial sacrifice we will all have to make is paying more for things we buy on a regular and occasional basis.
Inflation was running at routine levels until February, when the year-over-year rise in the cost of living reached 2.6 per cent. The end of the GST holiday contributed to the increase from January’s 1.9-per-cent inflation rate, but there was a broader trend of rising prices. Without a trade-war truce, tariffs will put even more upward pressure on costs in the months ahead.
The financial pain caused by renewed inflation is considerable. Roughly 1.2 million people are extra sensitive to higher living costs because they will renew mortgages this year at much higher rates. Meantime, jobs are already being lost because of the trade war and both food bank usage and consumer insolvencies are rising.
A lot of people are still traumatized by the last inflationary surge, where we saw cost of living rise by a peak 8.1 per cent in June, 2022. You see this anxiety clearly in the Trump Tariffs Tracker created by the polling firm Leger to look at how people feel about various aspects of our relations with the United States and the trade war.
Twenty-eight per cent of the 1,548 Canadians polled a few weeks ago said tariffs, U.S. aggression and President Donald Trump are the No. 1 issue Canada faces today, and 21 per cent said inflation.
Health care and housing affordability were ranked as the top issue by 11 per cent of poll participants. After that, issues such as government debt, immigration, taxes and climate change were chosen by 5 per cent or less.
Trade is obviously the most pressing issue in Canada right now. But inflation running a close second, way ahead of health care and climate? This is how people think after years of soaring prices for groceries, rent and mortgage payments.
Another glimpse of inflation’s toxic legacy can be seen in the results of an informal survey conducted through the Carrick on Money newsletter about whether parents believe their adult children will be financially better off than them. Stay tuned for a full report on the findings, but for now it’s worth noting that two-thirds of the parents who answered “No” to this question cited high living and housing costs as the reason.
CIBC Economics said in a recent bulletin that inflation will initially head higher in a trade war because a weakening Canadian dollar will raise the price of goods imported from the U.S., and because of our retaliatory tariffs on goods from south of the border. If we place a 25-per-cent tariff on a washing machine imported from the U.S., then expect retail prices to rise by a comparable amount.
CIBC sees the inflation rate in a trade war peaking this year at 2.9 per cent. Price increases would ease from there as a result of a slowing economy where jobs are lost and consumers cut back on spending.
This projected rise in inflation doesn’t look like much in comparison to the heights of 2022. But given how stressed people are about past inflation, it’s going to hurt.
Harsh as it sounds, many people are stuck with zero-sum personal finances in a long trade war. If you pay more in living costs, you have to spend less, save less or resort to borrowing. Raises and bonuses will be scarcer, and job security will decline. Higher inflation would also work against more declines in the interest rates that affect mortgages, lines of credit and loans.
One concrete thing people can do besides spending less is watching to see how prices track in grocery stores, which is where inflation was most painfully felt in 2022-23.
Question: will retailers raise prices on Canadian products as demand for them increases and tariffs raise the cost of U.S. goods? If you see that happening, send me the details. Financial sacrifices must be made in a trade war, but they don’t include an eruption of greedflation.
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