Sask. economics professor says inflation problems are largely a result of government spending

As prices squeeze consumers, one University of Regina economics professor said most of the blame needs to be placed at the feet of the federal government.

“During the pandemic, we saw an unprecedented increase in government spending. Most of that spending was financed basically by the Bank of Canada. Essentially, newly printed money,” associate professor of economics Jason Childs told CTV News.

He said the effects were “massive.”

“I don’t know personally of an experience in Canadian history where we have seen that kind of increase in the money supply outside of wartime,” Childs said.

“A big chunk of this has got to be laid at the feet of the federal government and the Bank of Canada.”

REASON FOR RISING COSTS

Childs explained that the ultimate problem was too much money chasing too few goods.

“We’ve seen a massive increase in the money supply in this country. At the same time, we’re getting crunched a little bit on the supply side.

“Those two factors come together and give us this really lifetime experience of inflation.”

While he agreed that supply chains and the price of oil were also playing a role, Childs said a large part of the cost of fuel was taxes.

“You’ve got the GST, PST, federal excise tax, carbon tax, and provincial excise tax. Anywhere from about 30-50 cents, depending on which province you’re in is going to be taxes on the price of fuel.”

WHY RAISE INTEREST RATES?

Childs said the Bank of Canada’s decision to increase interest rates was to get spending under control and ease the supply-demand tension.

“You curb demand by increasing the cost of borrowing and increasing the return to savings, which makes people save to consume rather than borrow to consume.”

He said the goal was to make borrowing more expensive, which slows down demand and “you get both firms and consumers to pull back a little bit.

“That is really the big tool they’ve got here is to keep raising interest rates.”

INFLATION FORECAST

“The big question is going to be how our government is going to react to what’s going on and the inflationary pressures,” Childs said.

“We’ve seen from the federal government that they’ve responded to the inflationary pressures and the hardship that it is causing, by spending even more money. That’s going to put even further pressure on the Bank of Canada to raise rates beyond what they would otherwise.

“If we have government and the central banks working at cross-purposes things can escalate pretty quickly.”

With files from Matt Young