My thoughts on the current inflation crisis

So ever since COVID and the crazy quantitative easing that has occured by many governments in the world, we now see an out of control inflation rate. Of course, it affects all of our daily lives - from the rising food costs to the gas we use. Rent is also at all time highs right now! I'd like to address a few key points in this article.

• What is inflation?
• What is causing inflation?
• My thoughts on inflation

So what is inflation?

Inflation is very simply "a persistent rise in the average level of prices over time" - Bank of Canada. The results of inflation are increases in prices such as food, services, and housing. You can see this anywhere, from the increased rent prices to your average meal going from a couple of bucks to now 10-20$ on average! This sounds terrible! Why do we need inflation then?

Well, that's a great question! A good amount of inflation has helped shape the modern world - from average wage increasing to easing international trade, inflation is almost seen as a key tool in helping an economy grow! In fact, having a good amount of inflation will make the real cost of something lower as there will be more of something produced driving down prices!

What is causing inflation?

The central bank (think Bank of Canada or the Federal Reserve) has tools to manipulate the inflation rate. First and foremost, the central bank's job is to maintain the inflation rate at 2%. Why 2%? Because they deemed that at that rate, prices wouldn't soar so much as to crunch consumers out of buying anything while allowing for good growth within the economy. The central banks have 2 key tools that they can use to control inflation (with a third tool introduced in 2008 by the federal reserve).

1. Interest rates - the central banks can increase and lower the interest rates of government bonds. The idea behind interest rates controlling inflation is this - if interest rates are increased, people will want to put their money in these bonds instead of purchasing consumables which drives down demand and lowers inflation. If interest rates go down, people will be more likely to not save money as there's no point in saving and will instead go spend it elsewhere.

2. Money supply - as you have probably heard, the government can control how much money is printed. Controlling money supply is directly controlling supply/demand since if there's less money going around, then less buying happens too.

3. The balance sheet - this is a new tool widely used after the financial crisis of 2008. Essentially, think of the central bank becoming a business. However, this business has the infinite money glitch and can buy anything they want (as long as the government is ok with it). With the balance sheet, the government can go out to buy stocks, bonds, and anything really! With that, they can use their money to either "give" a company money (by buying) or "take away" money (by selling). This is also how bail-outs occur.

I'd like to point out that in our current case, the inflation rate is a direct cause of the central bank's "over-stimulus" on the economy. Take a look at the interest rates that the central bank gave out during COVID and after. (I'm only taking Canada's economy as that's where I currently reside).

The inflation rate over time from 2019 - 2023

Overnight (interest) rate over time from 2019 - 203

We can see that there's a big lag between the government increasing interest rates and the inflation rate going down. In 2020, the government lowered interest rates to almost 0% which allowed businesses and people to buy a lot a lot of things. 

As demand increased while supply was stagnant / lowered due to the pandemic, we saw an increasing inflation rate. However, once we came out of the pandemic, the inflation rate kept on going up. The government realized that inflation rates were going out of hand and decided to step in by increasing interest rates.

However, currently, we can see that the interest rate's nearing 5%. However, the inflation rate is still not down to 2%! How could this be! My biggest guess is that there's a big preconception that the inflation rate will not slow down. So everyone is raising prices to account for a high inflation rate. However, this causes inflation to not go down! Oh the endless cycle!

My thoughts on inflation

So inflation is obviously good and bad. Too high is bad, too low is bad. I for one am actually quite against inflation. I think it should be much lower at say 0.5%. My reasons are that we are not in a period where a major scientific revolution is taking place. First and foremost, most of business and trade is a 0 sum game. If one person gains, the other loses. The ONLY exception to that is scientific discovery and innovation. 

Scientific innovation increases productivity and lowers the actual costs of goods and services. However, since we aren't in a period where a major invention has been made that altered our lives drastically, I think that we should slow the inflation rate down accordingly.

Another point I believe is that inflation is actually a hidden tax on the general population. Inflation is controlled by the central bank - and the central bank needs money. What can the central bank do when they need money? Print more money! What can the general population do when they need money? Work harder! For the central bank to indirectly fund their expenditures, the general population takes a toll known as inflation.

Another bizarre effect of inflation right now - tipping culture.

As we know, tipping is usually a percentage. In the old days, you tipped 10% for lunch, 15% for dinner. Anything more meant you did very well. That means a percentage of the food. Since food costs go up then the tip will go up as well. So it is absolutely bizarre to me that the tipping machines now ask for 18% to 25%.

This is just my little speel about inflation. I think time and time again as we have seen in the states, the ultimate way they have controlled inflation was by going back to the gold standard. If inflation deems too stubborn, I think there may be a chance that the federal reserve approach this method.

Thanks for reading!