The recent termination of the consumer carbon price is reportedly easing inflation in Canada, according to Randall Bartlett, deputy chief economist at Desjardins. As the country grapples with increasing costs of living amid an uncertain economy, the need for long-term investments in infrastructure is more important than ever. Economists are looking at what’s causing current inflation, including federal spending, tariffs and food and gas prices spiking.
As of August, food inflation in Canada stood at 3.4 percent according to Statistics Canada (StatCan). This figure illustrates the real harm that many Canadians are experiencing as they continue to deal with increasing costs while grocery shopping. In the backdrop of this economic landscape, both the Bank of Canada and Members of Parliament are addressing how various economic policies contribute to inflationary pressures.
The Role of Government Spending and Tariffs
That’s why Mostafa Askari, chief economist at the Institute of Fiscal Studies and Democracy at the University of Ottawa, provided us an exceptional perspective. He thinks the government should target its spending, spending specifically intended to increase supply, to relieve inflationary pressure. Askari points out that a minor, month-to-month increase in inflation is not alarming on its own. Yet, the cumulative impact of their never-ending uptick in pricing has seriously weighed on consumers, particularly when it comes to grocery shopping.
“If they thought there would be a risk (of inflation), they would not have done that,” – Mostafa Askari
Given all these lessons learned, political leaders are increasingly joining the chorus calling for smarter government spending. Conservative Leader Pierre Poilievre argues that the feds’ approach to deficits is driving up inflation in all sectors. He stated, “Deficits drive up inflation, grocery prices, housing costs, and interest rates.”
Bartlett reiterates fears about inflationary impacts from Ottawa’s proposed capital investments. He even goes so far as to argue that a new and sustained demand for construction labor and materials might bring on temporary inflationary pressures. He adds, “The proof in the pudding is going to be in the tasting, in terms of how effective this infrastructure investment is.”
Impact of Tariffs on Prices
In recent developments, Canada dropped most of its retaliatory tariffs on the United States at the beginning of the month. This is likely to have a big impact on the trajectory of inflation in the long run. Bartlett predicts that eliminating counter tariffs will reduce headline inflation by a full percentage point by 2026. This reduction will happen relative to cases where the tariffs continue.
Even with positive policy changes focused on taming inflation, Askari notes a key concern. All harmful counter tariffs on inputs for manufactured products become embedded within the final cost of those goods. This is stating that despite tariff cuts, consumers will unlikely be relieved from price increases right away.
In the central bank’s statement last week, they indicated that uncertainty over trade pressures continues. To counter the slump, policymakers reduced the benchmark interest rate by a quarter point to 2.5 percent. This action is meant to boost economic activity at a time when high inflation remains a persistent concern.
Current Economic Landscape and Consumer Sentiment
While Canadians tackle this new reality of the economy, what Canadians feel most and are most aware of is what’s hitting their pocketbook in terms of prices rising. According to Askari, while government spending is essential for stimulating demand, it must be managed carefully to avoid contributing to further inflation.
He observes that when government spends with real purpose and focus, it releases money back to Canadians and businesses. This increased spending can boost overall demand in the economy. Doing this while maintaining sustainable fiscal policies is proving difficult.
Bartlett points out that some policy changes, like the recent repeal of the consumer carbon price. The consequence of this recession leading to skyrocketing unemployment and gas consumption plummeting in recent months. This new change distorts year-over-year comparisons of inflation data, which makes it all the more important for analysts to interpret these metrics with caution.
