Madam Speaker, thank you for keeping decorum in the House.
As I was saying, we cannot take these huge price increases and the hardship they cause lightly, especially when it comes to the price of food, electricity and housing. My thoughts are with the millions of seniors who were already struggling to make ends meet before prices started going up. They are now facing an impossible task, making choices or making cuts to their budgets.
The inflation crisis is one of the most worrisome issues in the world, and I acknowledge that people are trying to address it and find solutions. I am going to put on my CEGEP economics teacher cap and give an overview of inflation and the economy.
The aggregate demand and aggregate supply model is a useful tool for understanding the phenomenon of inflation. This model tells us that inflation is caused by an increase in aggregate demand, a decrease in total supply or a combination of the two. Analysts generally agree that the increase in prices we are experiencing is essentially a global phenomenon primarily attributed to a decrease in aggregate supply.
The supply chain problem led to a significant drop in supply. It is the same thing with the war in Ukraine. Crop failures due to droughts or floods are also reducing supply in the food sector. Labour shortages, which existed before the pandemic but have gotten worse since, are limiting business activity, leading to a decrease in total supply, and so on.
On the demand side, we have seen more of a change than a significant increase in demand. During the pandemic, people shifted their usual consumer choices to new sectors. Supply was unable to adapt quickly enough, so we saw new price increases and often shortages, resulting from the imbalance.
We are seeing the same type of imbalance in the real estate market, where the construction of new housing is insufficient to meet demand. Inflation in that sector is also driven by the increase in the price of building materials, which is itself explained by the current inflationary situation and the change in consumer habits during the pandemic, not to mention the impact of the war.
Even though the central bank's injection of money into the economy and the government's support to keep consumption going during lockdown were more generous than necessary, because they were not always well targeted, the effect of those interventions on the increase in global demand and on prices is generally secondary. The government's actions are not the main reason for the global inflationary crisis.
Unfortunately for us, and especially for those impacted the most by the current rate of inflation, there is no simple solution to a decrease in aggregate supply. The best solution is to support businesses as they adapt to the new reality. It is a long and complicated process, but as I said, even if the effect is not felt immediately, it is the best solution.
For example, let us look at the labour shortage. The government could provide support for the automation of some economic activities. The government could also change the tax system to entice young retirees who want to remain in the labour market, perhaps with part-time work. The government could provide support for companies that invest in resilience, for example by making decisions that cut their energy consumption. The government could also do this for households, of course.
That is the primary solution for addressing the supply side of the issue. Unfortunately, this government is doing very little about it. I am also disappointed that the official opposition, which says it is concerned about this issue, is not putting this solution forward. Both major Canadian parties seem to be short-sighted on this issue.
It is often said that the central bank is well positioned to use monetary policy to counter inflation. The Bank of Canada must ensure that the overall economy is in good shape. To that end, its main policy objective for the past 30 years has been to keep the average annual increase in prices within a range of 1% to 3%. Obviously, we are well past the upper limit now.
Although the central bank is extremely well equipped to control inflation when the economy is overheating because of an increase in aggregate demand, the situation is very different in the event of a supply crisis. That is because successively raising its key interest rate does not allow the central bank to influence supply. It simply reduces demand.
In other words, since production is insufficient to meet the demand, equilibrium prices rise, and all the Bank of Canada can do is lower demand to reduce the price increase. However, at the end of the day, there are not more goods and services on the market, only less room to manoeuvre and borrow to make consumption or investment choices.
Such a monetary policy could pose a risk. If, at the time of implementation, the economy is not in an overheated situation where overall supply is basically inelastic, the central bank's action could also slow down the economy or even plunge it into recession. Considering how much the labour market is changing, this could almost be described as a quantum leap. The signals of the economic context are difficult to pick up, and there is a real risk that the monetary policy will be too restrictive and therefore impede growth.
Again, there is not much that either monetary or fiscal policy can do to respond to a supply crisis. These policies aim to reduce demand in order to lower prices, but they do not allow for increased production in the short term.
I want to reiterate that the best government policy is to support businesses and help them adapt and become more resilient in order to push supply back up, even though that does not happen automatically.
If there is one lesson we can learn from the global supply-and-demand model, it is that we need to avoid falling into the very tempting trap of responding to a decrease in supply by giving everyone money. That kind of policy may appear to meet people's needs, but it will quickly fuel inflation. It is therefore a futile, ineffective policy, especially if it drives society as a whole into debt. It is a good solution, but not for a supply-side crisis.
Tax cuts would have exactly the same effect. It is tempting, but it is a short-sighted solution that would make the problem worse, not better. Indeed, such an expansionist policy would actually thwart the central bank's restrictive policy. That would be the worst possible situation. England is currently experiencing major difficulties that illustrate what happens when policies clash like that.
What can we do? As I said, there are no simple or easy solutions. We can help companies pivot. We also have a moral obligation to help the most vulnerable people and the hardest-hit sectors cope.
I am thinking of low-income families and single people, especially seniors who live on modest pensions that are not indexed. I am also thinking of sectors that are particularly affected by inflation, such as agriculture. We also need to reinvest in social housing to respond to the housing crisis.
For goodness' sake, though, we should not send cheques to everyone, lower taxes for everyone or, above all, abandon our climate efforts.
