In November, economist Chris Waller told a business luncheon in Phoenix, Arizona, that the U.S. economy should continue to grow only slowly in 2023. Normally that would be a bad thing, he said, “but not now.”
To Waller, a governor of the Federal Reserve that sets U.S. monetary policy, glacial growth is proof that the Fed’s efforts to tame inflation are working. “Our goal is to rein in demand,” he said, noting that the Fed’s higher interest rates had already dampened consumer spending, slowed home sales and shaken up the tight job market. By mid-2022, the labour shortage had driven annual wage growth above 10% for the first time in 40 years.
Canada has shown similar steel as the annual inflation rate jumped from 1% in early 2021 to 8% by mid-2022. The Bank of Canada hiked interest rates seven times last year: a harsh reality for anyone who recently took out a mortgage with a variable interest rate. Yes, high rates halted the red-hot housing market, but with mortgage costs doubling, fewer Canadians can now afford to own their own homes.
In the United States, activist group Accountable.US has labelled the inflation battle a war on workers. “Apparently, millions of Americans likely losing their jobs under further rate hikes is a sacrifice the Fed is willing to make,” noted Accountable.US spokesperson Liz Zelnick in November. The former policy analyst for the Massachusetts Treasurer’s Office blames runaway inflation on companies taking advantage of COVID and supply chain chaos to hike prices way beyond normal levels. Indeed, by mid-2022, U.S. companies’ gross profit margins rose to 15.5%, a 72-year high.
“The Fed’s ill-advised policy only draws attention from the real culprit behind out-of-control costs: corporate greed,” said Zelnick. “Highly profitable corporations have kept raising prices on working families while rewarding wealthy investors with billions in new handouts.”
It’s not just activist groups saying so. In September, a number of speakers took turns accusing businesses of price gouging at a congressional hearing on “corporate influence on inflation.” The best known was former U.S. labour secretary Robert Reich, who said wages have lagged inflation for more than a decade. Reich said businesses are “raising their prices above increases in their costs.”
And those prices stick, he said, because most businesses “face so little competition. Since the 1980s, two-thirds of all American industries have become more concentrated.”
Reich urged Congress to adopt a windfall profits tax – and beef up antitrust enforcement to discourage unnecessary price increases, concluding that “the major effect of interest-rate hikes is to depress wages and eliminate jobs.”
Apparently, millions of Americans likely losing their jobs under further rate hikes is a sacrifice the Fed is willing to make.
-Liz ZelnickAccountable.US spokesperson
Canadians face similar pressures, but the inflation-relief debate is mostly missing. At the Conference Board of Canada, a leading economic policy think tank, chief economist Pedro Antunes says he supports the Bank of Canada’s anti-inflation medicine. He says the central bank reacted too slowly when inflation began creeping above its 2% inflation target in early 2021. “Inflation was eating away at our purchasing power, because there wasn’t enough production to meet demand.” With the central banks using a fiscal firehose to cool things down, Antunes believes the hard part is now over. The Conference Board now forecasts inflation will hit 3.8% in 2023 before settling around 2.2% in 2024.
Antunes is loath to address business profiteering. He says corporate profits are usually a percentage of sales – meaning that if prices are on the rise, you can expect higher profits than normal.
Not so sanguine is Sheila Block, senior economist with the Canadian Centre for Policy Alternatives. She agrees the inflation wave had many drivers – from COVID to Russia’s invasion of Ukraine – but insists that wage costs have not been to blame. She also notes that corporate profits rose from 12.5% of GDP in 2019 to 16.8% in mid-2022 – near their historic highs. She says Canada’s inflation problem stems not from excess consumer demand, but from a “perfect storm” of international issues and business opportunism.
“I don’t think the Bank of Canada is operating on any ill will,” she says, “but its policies are compounding the negative impacts of inflation.”
