Thank you very much for the invitation to be with you. I hope my observations will be helpful to the committee in its work.
I'd like to say, by way of background, that monetary policy and inflation have been central to my work at the C.D. Howe Institute since I was a much younger person, all through the high-inflation eighties, to the tightening that reduced inflation in the 1990s, and the inflation targeting since then.
I chair the institute's monetary policy council, which offers advice on the Bank of Canada's interest rate settings. Over the period that I've been working on it, things improved. Inflation got lower and more stable. We had fewer episodes of tight and loose monetary policy, which also made the economy more stable. As last week's CPI report underlined—an unpleasant surprise—that achievement is now, at the very least, at risk.
To prepare for our discussion, I have three thoughts.
To start, people hate inflation. I start there, because we sometimes hear that inflation is not so bad. Some economists think people should accept it, and reject the tighter monetary policy that would reduce it. I think those arguments miss the basic fact that people want their money to have a predictable value.
If you ask people how money's value should change over time and how much inflation we should have, most people will say that it shouldn't change. They want it to be like other weights and measures. If we step on a scale, if we're measuring flour for a recipe, or checking the temperature before we decide what to wear, we take for granted that the kilograms, the cups and the degrees are going to mean the same thing today that they did yesterday. That's why governments regulate weights and measures; it's so we can rely on them. People want the same with money.
That's why the high inflation of the seventies and eighties became a political issue. The cure was painful, but the disease was worse. It's understandable that Canadians dislike inflation, and it should be lower.
My second opening comment is going to echo some of the things that Professor Dehejia said. The macro view is that inflation means that money is losing its value. If you have more growth in the supply of money than the demand for it, its value is going to fall relative to the things we spend it on, and that's what's happening right now.
I emphasize that because daily experience doesn't feel like that. We notice that gasoline costs more when we're filling up than it did last time. Go to the store and lettuce is the surprise; last week, it might have been milk. It feels like different products are taking differently sized bites out of our dollar, rather than the dollar shrinking over time.
I mention that because people often focus on what's up lately, as though that caused inflation and as though subsidies or price controls could fix it. We saw attempts like that in the 1970s, but monetary policy stayed loose and inflation stayed high.
I will underline that if you look at the CPI in the latest readings, about three-quarters of the items are up by more than 2% year over year. That's more than at any time in the last 30 years. It's not just specific products; it's a decline in the purchase power of the Canadian dollar.
My last comment before taking your questions is that many advanced economies have inflation rates similar to ours, not because it's inevitable, but because they did similar things in reacting to the pandemic. Choices about monetary policy and fiscal policy got us here, and we are in control of those choices in the future.
To elaborate the point, energy and food are expensive everywhere, supply chains are stretched everywhere, but inflation isn't the same everywhere. It's in double digits in some countries, with Argentina and Turkey as examples. It's above 1,000% in Venezuela, it's about 2% in Switzerland and it's less than 1% in Japan. Inflation is high where monetary policy has been inflationary, and it is low where it has not been.
We're seeing inflation now above our 2% target because our response to the pandemic overshot. I think we need tighter monetary policy to respond to it.
I look forward to any questions you have about that, or any complementary policies that would make it easier or harder, but my closing comment is that we can do it and I believe that we should.
Thank you.