Economy, inflation, and interest rate – A complex formula
Right after the COVID lockdown, the term “inflation” became commonplace in households. Each day, media outlets extensively discussed inflation and interest rate hikes, leading to growing apprehensions about the likelihood of such hikes. Eventually, the Bank of Canada (BOC) indeed raised its prime lending rate several times in a bid to control inflation. Inflation, characterized by an excess of money chasing fewer goods, was attributed to various factors post-COVID, including supply chain disruptions, subsequent waves of COVID-19 in China, and the Russo-Ukrainian conflict, among others.
However, the true root cause of inflation may have been obscured, with some suggesting that COVID economic stimulus incentives led to an increase in the money supply (M2). This surplus money flooded the market post-lockdown, exacerbating the scarcity of goods and services. With interest rate hikes being the primary tool at the BOC’s disposal, these measures were implemented, while simultaneously, the government injected significant cash into the economy to stimulate post-COVID recovery. Paradoxically, unemployment rates decreased, further contributing to increased employment and liquidity in the market.
This confluence of factors appeared to work against the fundamental principles of inflation control. Despite government hints at a soft landing for the economy, implying a mild recession, this scenario did not materialize. However, the government exercised caution to avoid a forced landing, which would entail deliberately inducing a recession.
In my opinion, the BOC’s actions in aggressively increasing interest rates were notable. In the latter part of 2022, I conducted an extensive analysis of this situation and collaborated with a journalist to produce a video addressing these concerns. Although the video was initially shared on social media, I subsequently posted it on the blog in March 2024.
Please watch the video