As central banks slashed interest rates to historic lows and embarked on large-scale bond purchases to spur inflation and economic growth, the inflation they sought ended up in stocks and real estate, not food and clothing. The beneficiaries of these central bank actions were the wealthier households that owned assets, while lower-income households fell further behind.
The report explains that inflation should have risen further in the post-2012 period but didn’t because the economic rebound was narrowly concentrated and it advantaged the higher-income brackets. The sectors that dampened inflation were those in which lower-income households typically spend a higher percentage of their income compared to higher-income households—food, clothing, alcohol and tobacco, and pet expenses.
The study also focuses on the late 2009 to the end of 2011 period when the Canadian economy was slumping, yet inflation did not fall as much as expected. The sectors that expanded during those years that kept prices from dropping were very different from those of the post-2012 period. They did not include food and clothing—the sectors heavily influenced by the spending of lower-income households.
“The robustness of this link suggests that the industry makeup of economic growth matters for inflation behaviour, and as a result, matters for monetary policy,” said study co-author Farah Omran in a press release.
According to the C.D. Howe study, however, “In Canada’s case, inflation has averaged 1.56 percent since 2012, well below the Bank of Canada’s 2 percent target.”
However, cost-efficient technologies should normally lead to greater productivity and thus put downward pressure on inflation, as the economy has more room to grow.
Inflation, measured as the price increase in consumer goods, is often affected by transitory factors like a period of high gasoline prices, but central banks attempt to understand its underlying trend. The Bank of Canada uses three measures of core inflation that filter out noise from temporary factors.