Inflation conjures up negative connotations for many people, but low levels of it are often a sign of economic growth, according to Lucas Herrenbrueck, associate professor of economics at Simon Fraser University.
However that doesn’t mean that there’s no reason to have an eye towards ensuring that healthy inflation doesn’t grow into something harmful.
Current rising prices for things like rental cars, airfares and commodities are largely the result of bottlenecks in supply chains that are creating shortages while demand increases as North America comes out of the pandemic, according to Mario Seccareccia professor of economics at the University of Ottawa.
For example, many rental car companies sold off portions of their fleets to weather the pandemic storm as travel declined. Now, with vaccines rolling out and people eager to travel again, those companies are buying any cars they can get their hands on.
It takes time for supply to catch up to demand and, until it does, prices increase.
Inflation has many causes.
“High inflation has [a number] of ingredients, and the government spending a lot of money is not the only one,” said Herrenbrueck. “If the government is spending a lot of money, then that’s extra demand, and it would drive up prices … but it doesn’t mean that every time the government spends more money it will drive up prices. It depends on the context.”
In the 1970s, that context was high government spending coupled with oil supply shocks from an OPEC (Organization of Petroleum Exporting Countries) embargo and the Iranian revolution, which sent food and energy prices soaring in North America.
The combination of those events resulted in a dramatic rise in inflation as demand exceeded supply on a host of fronts.
Seccareccia said that inflation arising from capital constraints is extremely rare and has occurred only in times of war, when there have been widespread business dislocations or shocks to import prices triggered by major events such as the OPEC oil embargo.
But Herrenbrueck said an entirely new set of events could result in runaway inflation in the global economy in the future.
Inflation remains a key gauge of the economy and, as with any measurement, it is important to monitor and ensure that it doesn’t swing too far in either direction. Herrenbrueck added that a sudden increase in prices as the world recovers from the pandemic-induced economic slowdown is not a surprise.
“Inflation, being a little bit higher as we are recovering from the pandemic is just normal,” he said. “It’s just not something to react to; it’s like seeing it rain in Vancouver.”
– Albert Van Santvoort
