There aren’t any good alternatives, which is regrettably the answer to the first question. But the potential recession might not be as severe as initially anticipated.
Ambler and Kronick noted warnings against raising interest rates from some analysts, who believe that rising oil prices brought on by the conflict in the Ukraine and congested supply chains are the main source of Canada’s inflation. Believing inflation today is mainly a supply-side issue, they support a wait-and-see strategy and believe that rate increases are mostly ineffective.
But although supply issues are important, the two argued against fixating on them, noting that inflation results from an imbalance between supply and demand for goods and services. In May, the Bank of Canada’s target range of 1-3% was exceeded by inflation for more than 70% of the products and services included in the consumer price index, an average indicator of how much households spend for goods and services.
To Ambler and Kronick, it is not surprising that inflationary pressures are so pervasive. During the pandemic, money growth rates reached 40-year highs, and the size of chequing and savings accounts grew to new heights.
Money in excess loses value, which results in higher pricing. By slowing bank loans, for instance, higher interest rates will restrain the increase of the money supply. As households save more money, spending will decrease, which will lower inflation.
