"Technical stagflation" might give the Canadian economy some much-needed elbow room
The impact of the Russo-Ukrainian conflict on global price trends will likely trigger an economic deceleration in Canada alongside higher consumer prices, according to former Bank of Canada governor Stephen Poloz.
“The rise in commodity prices and food prices across the board are sucking income out of everybody’s pockets. They’ve lost money for all the other sectors of the economy, so there will be a slowdown in the domestic economy as a result of that,” Poloz said in a podcast published by the C.D. Howe Institute last week.
Paradoxically, the much-feared “stagflation” status would be the preferred outcome in such an environment – more specifically, an interval of “technical stagflation” where growth slows moderately, not “the kind of roaring stagflation like we had in the seventies,” he argued.
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“If instead you raise interest rates really fast to prevent any inflation from affecting the Canadian economy, well you’d be forcing a disinflation shock through the rest of the economy, probably with a major slowdown, or even a recession. That would be nonsense,” Poloz said.
Former governor David Dodge allayed concerns surrounding this possibility, saying that any stagflation that might stem from current trends would be drastically different from conditions seen nearly five decades ago. Canadian inflation reached double-digit levels and unemployment exceeded 8% in the 1970s stagflation era.
“Yes there is a danger that we’ll have inflation on an ongoing basis a bit above perhaps the 2% target that we had been used to, but we’re not in the same position as we were in the seventies,” Dodge said in the podcast, where he was interviewed alongside Poloz.
