Fighting inflation can’t be left to central banks alone

Yasmin Abraham, Lisa Rae and Rachel Samson | March 15, 2024

This article originally appeared in The Hill Times on March 13, 2024 

With inflation starting to come down, many seem to believe that the affordability crisis is coming to an end. This is not the case for those with low incomes, who will remain squeezed between the high costs of basic needs, and wages and benefits that have not kept pace.  

Even if the Bank of Canada’s efforts succeed in bringing overall inflation down to a 2 per cent year over year increase, prices will still be far higher than they were three years ago.     

The cost of basic needs such as housing, food and energy may also be the trickiest to address, given the complex dynamics on both the supply and demand sides of the challenge. And focusing efforts solely on prices ignores the fact that some households simply do not have sufficient income to cover the costs of essentials. 

On housing, the Bank of Canada has acknowledged that interest rates alone will not bring down prices.  The fundamental issue is that there are too many people with too few places to live. Governments at all levels need to step in to get housing built as quickly as possible by tackling the barriers facing not-for-profit and private developers. And they also need to take a hard look at the demand side of the equation. 

Food prices are another area that deserves more targeted analysis. The war in Ukraine led to a spike in grain prices that rippled throughout the world in 2022. Climate change is also wreaking havoc with food prices. Drought in California in 2022 contributed to Canadians paying 11 per cent more for fresh vegetables versus the previous year. And drought in Brazil led to higher coffee and sugar prices. The drought predicted in Canada’s prairies this summer could contribute to food prices staying high. Interest rate increases and finger-wagging at grocery retailers isn’t helping families who are struggling now to put food on the table. 

With more and more Canadians struggling to afford groceries after they pay bills for rent and utilities, governments can no longer take a wait and see approach. Food and shelter prices are at least 20 per cent higher than they were in 2021. Almost 7 million people in Canada, including 2 million children and forty per cent of single mothers, are living in food insecurity and food bank use is up 80 per cent since 2019. The long-term effects of food insecurity on families and children should be setting off alarm bells.  

Governments need to step in to ensure that incomes are sufficient to put food on the table. Recently, the Affordability Action Council recommended restructuring and expanding the GST/HST credit aimed at low-income households and renaming it the Groceries and Essentials Benefit.  

Gasoline prices and home heating costs are also top of mind for many Canadians. Energy prices have been a major driver of inflation, though they have moderated over the past year. The long-term outlook for oil and natural gas prices, however, is for more volatility, a reality that will be the most challenging for lower-income households, who tend to live in more inefficient homes, are unable to afford the upfront costs associated with increasing the efficiency of their home or switching to alternatives such as heat pumps and electric cars.  

In Canada, governments have largely failed to see the bigger and longer-term picture on energy affordability. Proposed temporary fixes, such as pausing the carbon tax on home heating fuels, could leave low-income households worse off because of the loss of rebate payments. It will also not help households in the long run, since the main drivers behind oil and natural gas prices will be global market forces.  

The real, lasting affordability solutions  to energy prices are those that help households reduce energy use, increase the efficiency of their homes, and reduce their reliance on volatile fossil fuels. Government support for low-income energy efficient home retrofits, heat pumps, and convenient public transit is far more effective than temporary tax changes. Governments should also do more to ensure houses built today are future-fit, with less reliance on fossil fuels and driving, and greater resilience to growing climate change-related risks from wildfire smoke, flooding, and heat waves.  Otherwise, the wave of home-building will set Canadians up for decades of recurring affordability crises 

In the ongoing fight against inflation, central banks and governments should be working in tandem to better understand the underlying factors behind price increases, to analyze potential future sources of price volatility, and to outline clear steps that can be taken, while taking into consideration the realities of families across the income spectrum.  

One of the most important roles of governments is to ensure that its people have a roof over their head and food on their table. It is time they step in with bolder interventions, rather than relying solely on the Bank of Canada. 

Yasmin Abraham is President and Co-Founder of the Kambo Energy Group and a member of the Affordability Action Council. 

Lisa Rae is Director of System Change at Prosper Canada and a member of the Affordability Action Council. 

Rachel Samson is Vice President of Research at the Institute for Research on Public Policy, one of the founding organizations of the Affordability Action Council.