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Emerging stronger in times of inflation

DAVID OLIVE

How will Canada’s bout with inflation permanently change the way we live?

It’s a question worth asking since the way we live today is heavily influenced by dramatic changes in our lives caused by the Great Inflation of the 1970s and early 1980s.

At a current 7.7 per cent inflation rate, the most recent measure by StatsCan for the month of May, our cost of living is rising at the highest level since 1983, the last year of the Great Inflation.

Our current experience with abnormally high inflation will change our lives too.

Indeed, significant changes are already underway, only eight months into our first brush with sustained high inflation in almost four decades.

The transition from fossil fuels to clean energy is accelerating in response to soaring prices for fuel and, in Europe, dire forecasts of fuel shortages.

The pace of “re-shoring,” a.k.a. inshoring, or developing local sources of goods, has also picked up in reaction to overlong supply chains.

And there are early signs of shifts in consumer behaviour, as shoppers begin to balk at high prices.

We are even rethinking the role of housing. Should we continue to regard a house as an investment rather than simply shelter?

There have always been experts to argue that renting frees up personal funds for more profitable investments than a principal residence. They are getting a wider hearing than ever. And urban planners warn that housing as an investment is culpable in the affordable housing crisis.

It’s never wise to expect things to fundamentally change based on current conditions. After all, today’s inflation is forecast to ease this fall and by next spring be at just half of its current level.

But abnormally high price levels will not end next spring.

After dropping to a range of four per cent to five per cent in the first half of next year, inflation will probably linger above the Bank of Canada’s preferred level of around two per cent for another two or three years.

And the longer it takes to achieve “price stability,” the economists’ term for consistent low inflation, the more likely the changes now underway will become permanent fixtures of our lives.

That’s why the wretched period of the Great Inflation is instructive. It helped shape the way we live today and provides a heads-up on what we can expect coming out of our current inflation hardship.

The Great Inflation was a malaise that lasted almost a dozen years, from 1972 to 1983. The average inflation rate for that period was almost nine per cent, peaking at 12.5 per cent in 1981.

The term “stagflation” came into popular use to describe the runaway inflation, poor economic growth, and high unemployment of that period.

And what is the legacy of those miserable times?

We learned how to beat inflation. In the early 1980s, central banks in Canada and the U.S. raised interest rates sky high to kill inflation. Doing so caused a deep but relatively brief recession.

The reward was more than three decades of price stability. Inflation in Canada averaged just 2.0 per cent between 1990 and 2019.

The central banks are now using that same powerful method to beat inflation, at the risk of triggering a mild recession next year. A 2023 recession may or may not be in the cards. But the eventual return to normal inflation in the 2.0 per cent range is a certainty.

RSPs became the rage. Invented in 1957, RSPs did not become widely popular until the Great Inflation, when annual contributions to RSPs increased more than 16-fold, to $3.9

The Great Inflation provides a heads-up on what we can expect coming out of our current inflation hardship

billion. Inflation destroys the value of money. Canadians became determined to protect their wealth for retirement with tax-sheltered investment income.

Automation. Spiralling labour costs in the 1970s saw the first widespread automation of the manufacturing sector. It also saw a new trend of offshoring work to lowwage jurisdictions.

But automation also kept Canadian goods cost-competitive and southern Ontario attractive to foreign investment.

Today, Canada and the U.S. are at full employment, partly with the advent of Information Age jobs with better pay and job security.

Canadians embraced econo-cars, until then dismissed as toys. The Great Inflation ushered “land yachts” into the grave.

We became even savvier shoppers. Walmart and Costco, with their everyday low pricing, came into their own in the 1970s, along with “offprice” retailers such as Winners. So did private label goods, or store brands, earlier rejected as being of inferior quality, but now seen to offer better value than national brands.

No one would wish for a Great Inflation, or today’s painfully high prices.

But by forcing a re-examination of how we live, adversities have brought improvements of lasting benefit.

In decarbonizing our economy, in making Canada more self-sufficient in goods, in reinventing our approach to housing, we stand a chance of coming out of these difficult times stronger and smarter.

Let’s not waste it.

BUSINESS

en-ca

2022-07-06T07:00:00.0000000Z

2022-07-06T07:00:00.0000000Z

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