*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[opendoor]

To me this current situation has much more in common with early '50s inflation than it does '70s inflation:

1950-52:

-after a recession in 1949, the economy began to recover and the money supply increased relatively quickly.

-a supply crunch stemming from the start of the Korean War caused prices to go up, and inflation shot up to almost 10% in a relatively short period of time.

-unemployment was extremely low even during the high inflation period

That inflationary period ended relatively quickly after about 1.5 years of elevated inflation without interest rates moving up at all. Supply constraints worked themselves out over time and price growth returned to a normal level. There was a recession after this period, but runaway inflation never happened even with interest rates remaining flat.


1970s:

-inflation moved up slowly over the 2nd half of the 1960s with little done to counteract it. It started at 1.6% in 1965 and increased to 2.9% -> 3.1% -> 4.2% -> 5.5% and was 5.7% by 1970. This led to elevated inflation being relatively entrenched.

-In the early '70s, oil saw a massive increase in price. For most of the '60s, oil was about $3/barrel. In 1974 that went up by 4x and inflation followed, hitting 11% in 1974. And then it kept going up with little to no relief, and eventually ended up at about $37 by 1981, over 12x higher than the 1960s average price.

-the unemployment rate started to increase in 1970 as inflation increased.

-the money supply kept increasing year after year after year. In Canada at least, it increased by an average of about 15% a year through the 1970s. That's basically equivalent to maintaining the money supply increase we've seen with COVID for a decade straight.


Now:

-Because of COVID, the money supply increased relatively quickly, however that has largely ended. 2022 is on track to see the 2nd smallest increase in M2 in Canada in the last 30 years. If we have a couple of years of slightly below average money supply increases (e.g. 5-6% instead of 8-9%), we'll be right back at the historical trajectory.

-as much as people complain about central banks' slow reactions, they are reacting relatively quickly by historical norms. That didn't happen in the late '60s and '70s.

-unemployment remains at historically low levels (though that could obviously change) and there is already evidence of wage increases moderating a bit (which indicates that a wage-price spiral isn't happening yet).

-energy prices have already pulled back by over 20% from their peak. In the '70s, that didn't happen. Oil never went down by an appreciable amount. From 1976-1978 for instance, the difference between the high and low oil prices within each year was never more than a 5% difference. Oil dropped more than that on Monday alone.


The 1970s inflation was largely driven by energy prices leading to runaway inflation. But the chance of us seeing similar increases in energy prices is essentially zero. The equivalent would be something like $300 oil in the next year or two and then $900 oil a few years after that. So if energy isn't going to increase as much as it did then, and money supply is tightening (which it didn't then), then I don't really see what's going to fuel long-term 1970s style runaway inflation.

[opendoor]

Originally Posted by burn_this_city

This stuff is nonsense, every central bank was saying the same thing. Why is conservatism steeped in everything is a conspiracy these days?

Just be thankful we don't have people in here talking about "real" inflation numbers and how the government is covering it all up. Some people try to argue that we had 8-10% inflation for most of the 2000-2020 period and are seeing 20% inflation now, even though we can all look at the prices and see for ourselves.

[Azure]

Inflation does seem much higher than the 10% being stated.

Not sure what the real number is but it seems higher.

[opendoor]

Originally Posted by Azure

Inflation does seem much higher than the 10% being stated.

Not sure what the real number is but it seems higher.

One person's impression is more or less meaningless because inflation is an average. So a person who spends a lot on fuel, who has recently changed residences, and who spends a lot on food might experience significant inflation. On the other hand, a person who doesn't drive a whole lot and who owns a house on a fixed-rate mortgage might experience almost no inflation right now (and some have even seen their housing costs go down as they've renewed at lower rates than they were paying previously).

And of course, the logic has to follow that if the current inflation rate is massively under-reported due to poor methodology or nefariousness, then the same would hold true for prior years as well. But when you take that back far enough, you end up seeing that that simply cannot be true. If inflation in the last 20 years was as high as most inflation-truthers want to argue, then the average price of goods would have gone up by about 6-7x in the last 20 years, which is obviously not true.

[Buff]

Originally Posted by You Need a Thneed

So glad I got my mortgage renewal done a couple months ago.

I missed the boat.

I intended to but life kept me busy.

[blankall]

I do think there has been higher than posted inflation since 2000. It's been hidden by getting lots of cheap goods from Asia. Rent, tuition, labour, food, etc... have all been increasing at far more than 2% per year. Meanwhile goods like electronics, clothes, etc... have not been increasing as quickly in price, as they were outsourced and the internet allowed their acquisition at cheaper prices.

[opendoor]

Originally Posted by blankall

I do think there has been higher than posted inflation since 2000. It's been hidden by getting lots of cheap goods from Asia. Rent, tuition, labour, food, etc... have all been increasing at far more than 2% per year. Meanwhile goods like electronics, clothes, etc... have not been increasing as quickly in price, as they were outsourced and the internet allowed their acquisition at cheaper prices.

I mean yeah, that's how inflation works; it's a measure of prices paid. It doesn't matter why things are cheaper or more expensive, only that they are. If consumer goods are cheaper because of outsourcing, then inflation of the prices of those goods will be lower than it otherwise would be.

And at the same time, money saved on goods due to prices staying low will normally to find its way into other areas. So in the counterfactual where the price of goods rose at a faster rate, then things like housing costs probably wouldn't have risen as quickly because there'd be less money to spend on that.

[Azure]

https://twitter.com/user/status/1547143018561605634

[opendoor]

Yeah, most signs (commodity prices, bond yields, etc.) are pointing towards growth in prices dropping in the coming months. Unfortunately all those things can also indicate a recession. But of the two, runaway inflation is worse.

[blankall]

All the "investments" have plummeted in price too: NFTS, cryptocurrency, sneakers, collectibles, etc... too. Pretty clear indication that people are being tighter with their cash.

Hopefully, we will get relief when supply chain issues end.

[Azure]

Also on the supply chain front there are indications of shipping lanes opening up as well.

My bigger concern is what the natural gas issue will do to European manufacturing.

[Azure]

Other question, if things slow down quick, and inflation drops back in 3 months to more reasonable levels, are the interest rates lowered? We are at 2008 levels, and at some point you'd think they want to get out of the recession ASAP.

[opendoor]

That was one of the mistakes they kept making in the '70s. They raised rates, inflation lowered, and then they lowered rates soon after to spur the economy. It got them out of their recessions, but then inflation came back stronger each time. Finally in the '80s they kept rates ridiculously high for years after inflation subsided to finally kill it (that was when you could get 6-7% returns on GICs after inflation).

But macroeconomic conditions were a lot different then, so that doesn't mean the same thing needs to happen now. They were still drastically increasing the money supply through that period, so as long as they don't do that again, elevated rates for a prolonged period might not be needed. Still, there is always the risk of lowering rates too soon. But whether they have the wherewithal to keep rates higher during a recession in order to be sure inflation is tamed is an open question. I suspect not, and bond markets seem to agree. Hopefully it is just supply crunches causing current inflation, which would mean there's less of a risk when inducing demand through lower rates.

[Hack&Lube]

ELI5 but what's the real difference between the already 2.5% rate from a few days ago and the target rate which is about the same after today (100 percentage points)? Was it just the announcement vs action?

[opendoor]

The target rate was 1.5% before today:

https://www.bankofcanada.ca/core-fun...interest-rate/

[GGG]

Originally Posted by Azure

Other question, if things slow down quick, and inflation drops back in 3 months to more reasonable levels, are the interest rates lowered? We are at 2008 levels, and at some point you'd think they want to get out of the recession ASAP.

I would suspect they want to hold the rate higher to get back to some semblance of control over monetary policy and have the ability to counteract future recessions. 2.5% is still a historically low interest rate and anyone who was stress tested should be okay on mortgages.

We also have at least until March 2023 of headline inflation rates being high just by the nature of year over year reporting.

[PeteMoss]

Originally Posted by blankall

All the "investments" have plummeted in price too: NFTS, cryptocurrency, sneakers, collectibles, etc... too. Pretty clear indication that people are being tighter with their cash.

Hopefully, we will get relief when supply chain issues end.

Ocean freight costs from Asia to North America have dropped considerably in the past 4-5 weeks or so.

[Yoho]

Corporate debt will be the death blow. Expect mass layoffs to move in step.

[Slava]

Commodities have fallen significantly over the past month or so, which will drop inflation as well. The inflation print yesterday is purely lagging, so it’s not considering things like the falling price of gas (seemingly everywhere but Alberta). Things are slowing, and these rate increases take time to work through the system. You don’t increase rates one day and see a result through the economic system the next. It takes months.

[Muta]

Living by yourself with a mortgage SUCKS right now lol. If things keep going more expensive they way they are at the rate they are, I'm gonna have to eventually either find a roommate (yuck) or a find a gf and live with her (booo). Damn this inflation, ruining my independence.