Sticky Canadian inflation means new political fault lines between young and old

Theo Argitis: Dispatches from Ottawa

Stickier-than-expected consumer price data out of the U.S. this week is raising questions over whether global central banks are overpromising on their ability to bring inflation back to pre-pandemic norms of about two per cent.

The Bank of Canada is not immune to that debate. We’ll get January inflation numbers for Canada next week, but it would be naive to assume Canada’s central bank would somehow succeed on inflation should the U.S. Federal Reserve fail.

Inflation and interest rates being permanently higher than pre-pandemic levels is very plausible, and will have far-reaching implications for policy makers and governments should it materialize.

For one, it means fewer resources to do what governments want to do. The higher borrowing costs — especially after a massive run-up of debt — will blunt many political ambitions. David Dodge and Robert Asselin have written the seminal report on those emerging budget constraints.

Second, monetary policy will become increasingly politicized.

Should inflation prove sticky on the way down, the Bank of Canada could find itself struggling to deliver on its two per cent inflation target without manufacturing a deep recession.

The last federal election was a missed opportunity to debate the central bank’s mandate, but that’s going to change. High borrowing costs will make some economists and certainly politicians consider whether there may be trade offs between interest rates and inflation — in other words, whether the Bank of Canada should tolerate higher inflation to ease the interest payment burden for indebted Canadians.

Third, new political fault lines will emerge, particularly between generations. If we are entering a world of more scarcity and trade offs, that means more fights over resources and parties may need to take sides.

Young Canadians got hit hardest by COVID-19, since they are more likely to work in sectors that were shut down by the pandemic such as retail. They also face a bigger burden from higher interest rates given many are being forced to take monster mortgages to buy homes. It’s not difficult to predict, for example, how they would lean in any debate over higher interest rates versus inflation.  

Older Canadians meanwhile hold less debt, and more likely to have fixed incomes and savings that are quickly being eroded by inflation. Older generations, in theory, will be more wary of inflation than higher rates.

This generational fault line overlaps across other existing political divisions, making the politics even trickier. Canadians living in expensive cities are more debt heavy than those living in more rural or small population settings.

It will be a minefield for parties looking to straddle the divides.

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