They can’t have it both ways.
Following the news that inflation is now 2.8%, the Liberal government went on a bit of a victory lap.
For example, as noted by Conservative Deputy Leader Melissa Lantsman, Finance Minister Chrystia Freeland celebrated the number at a recent event in Colorado:
“While our out-of-touch Prime Minister says Canadians have never had it so good, the Finance Minister tells a room full of people in Colorado that everything is great.
They caused inflation to soar and today Canadians are paying the price. Grocery inflation is at 9.1%, mortgage interest inflation at 30% and rent inflation at 5.7%.
This is wildly out of touch. Minster, come home and talk to struggling Canadians – they’ll tell you.”
While our out-of-touch Prime Minister says Canadians have never had it so good, the Finance Minister tells a room full of people in Colorado that everything is great.
They caused inflation to soar and today Canadians are paying the price. Grocery inflation is at 9.1%,… pic.twitter.com/G1ynndidLq
— Melissa Lantsman (@MelissaLantsman) July 22, 2023
Notable here is that the Liberals have spent the last few years complaining that inflation is completely out of their hands and is due to global supply chain issues and other events outside of their control. That is at least a fair argument if they actually stuck to it.
But they haven’t. Instead, it has been used in a highly-situational and thus hypocritical manner. When inflation was surging, the Liberals claimed they had nothing to do with it. Yet now, when it is lower, they are running around claiming that it has something to do with their economic leadership.
Base year effect
Aside from their hypocritical rhetoric, the celebration of 2.8% inflation is quite premature. The ‘decline’ in inflation is in large part due to a base year effect.
The base year effect is a statistical phenomenon that occurs when calculating percentage changes, such as inflation, from a particular reference or “base” year. When the base year is a period of unusually low or high levels, subsequent percentage changes can appear misleadingly high or low, respectively.
In Canada, when we talk about the headline inflation rate, we are talking about a number that is measured as a year-over-year percentage increase in the Consumer Price Index (CPI). Suppose in the base year, the economy experiences deflation (a decline in prices). Then, even if prices in the following year merely return to their pre-deflation level, the inflation rate will appear exceptionally high due to the low base. This inflation is not indicative of an overheated economy, but rather a return to normal after an unusual year.
Conversely, if the base year is a time of high inflation, even normal price increases in the next year can seem to indicate a significant reduction in inflation.
Thus, base year effects can distort the real picture of inflation trends. This is what is happening in Canada. In the chart below, you’ll notice that June of 2022 was the peak of inflation:
Thus, the most recent inflation rate number is based on a comparison to an extremely high inflation number a year ago.
That number will drop off next month, meaning current inflation will be compared to a lower number as we go along. This could lead to higher inflation readings, calling into question the celebratory mood of the government. Also, it can be easy to forget that ‘lower inflation’ doesn’t mean prices are going down, it just means they are going up at a slower pace. And since those ongoing price increases are based on prices that are already much higher due to accumulated inflation, many people won’t feel any relief at all.
Who is responsible for grocery inflation?
One thing the Liberals haven’t talked much about is the fact that the inflation rate of groceries is 9.1%. Yet, if they expect to get credit for the overall 2.8% inflation rate, aren’t they also responsible for the ongoing surge in grocery prices?
They can’t have it both ways. They can’t only be responsible for what benefits them politically but not responsible for what hurts them politically.
Instead of going on a victory lap, the Liberals should consider being more humble. The economy is stagnant, Canadians are falling behind on a per capita basis, the nation is badly divided, and the cost-of-living is still surging. Any reasonable government would realize there is little to celebrate at this time.
Photo – YouTube
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