Documents provide insight into gloomy finance ministry outlook and inflation warnings

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OTTAWA — Newly released documents show the Department of Finance warned last year that the pace of price increases could accelerate, even though the Liberal government and central bank argued inflationary pressures were temporary.

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In a briefing note to Finance Minister Chrystia Freeland in the spring, officials laid out “the case for runaway inflation” as part of a broader review of consumer prices.

While the majority of the pressures at the time stemmed from price comparisons with lows seen a year earlier during the first wave of the COVID-19 pandemic, the briefing note says inflation readings could rise or that there were “plausible upside risks to inflation”. medium-term prospects”.

The note was written after Statistics Canada announced that the annual inflation rate had reached 3.6% in May 2021. The rate has since increased further.

The document is one of several on inflation that the Department of Finance created last year and obtained by The Canadian Press under the Access to Information Act.

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In a presentation in June, finance officials noted that inflation figures would remain high in 2021, relying on forecasters who believed supply chain issues inflating prices would dissipate to prevent runaway inflation. .

The annual inflation rate reached 4.7% in November. RBC senior economist Nathan Janzen said the December reading could be a bit higher when Statistics Canada releases its inflation report on Wednesday.

A Bank of Canada poll released on Monday noted inflation as the top economic concern for consumers, who also expect inflation to remain close to 5% for the year.

The inflation rate for 2021 is expected to be double what the Department of Finance relied on in the first-quarter survey of forecasters, said Stephen Tapp, chief economist at the Canadian Chamber of Commerce. .

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“That’s probably one of the biggest misses you’ll ever record,” Tapp said. “That was the biggest positive shock to inflation that I can remember by far in my career as a forecaster. So that’s huge.”

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Inflation rates are also now higher than they would have been had the consumer price index remained on a 2% path, meaning prices have now risen above just offsetting declines. observed in 2020, said economist Trevor Tombe of the University of Calgary.

Wages have not kept pace, creating a particular crisis for low-income households who cannot so easily handle the price hikes of things like gasoline and food, said firm economist Tu Nguyen. accountant RSM Canada.

Supply chain disruptions were a major reason for the price hike.

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In a June Question Period memo, the department suggested Freeland respond to questions about inflation by saying the government’s budget “would help rebuild and increase supply capacity, thereby increasing the space growth of the economy without the risk of high inflation”.

The start of 2022 saw a backlog of ships unable to offload cargo – supply logistics company Flexport had more than 120 ships waiting to dock at busy ports in Los Angeles and Long Beach. Freight booking firm Freightos also said shipping container costs remain eight to nine times higher than pre-pandemic levels, even with a recent drop.

The concern that finance officials reported in the spring was whether temporary problems affecting inflation, such as supply chain problems, “will last long enough to be perceived as permanent.”

That is why the ministry stressed the need to monitor expectations lest they create a cycle of price increases, as companies pass higher costs onto consumers, which then puts pressure on salaries to maintain them.

Consumers and businesses in the Bank of Canada’s survey, conducted before the latest wave of COVID-19, expected high inflation this year and next.

“It will be very important to keep an eye on this year: if people start behaving in a way that expects higher inflation,” Tombe said. “If they do, then it may be a force creating the very thing they were worried about.”

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