Why we won’t see low inflation again

The Bank of Canada has stated that its goal is to get inflation in this country back down to a target of 2 per cent. Central banks around the world have similar goals, including the U.S.

But we will never get there, says an automotive aftermarket industry observer.

The Bank of Canada raised its key interest rate to 4.5 per cent at the end of January in an attempt to cool red-hot inflation. It has worked as inflation fell from a high of 8.1 per cent in the summer to 6.3 per cent in January.

Even though Bank of Canada governor Tiff Macklem called inflation “too high,” John Price, managing director of Americas Market Intelligence, warned that inflation and interest rates won’t go back to where consumers want.

But that doesn’t mean things won’t get better. He said we’re about halfway through the fight to bring inflation down to central banks’ targets of 2 per cent even though we won’t actually get there.

“But the point is this: That the light is at the end of the tunnel and the amount of further increments to the interest rates will be limited to probably no more than one more percentage point,” Price said during the recent MEMA Aftermarket Suppliers Global Summit in Miami.

Still, the realization of not having such low inflation will come as a shock to many people — most people around the world have been used to living with the expectation of 1 or 2 per cent inflation.

“But the fact is that we’ve been living in a Goldilocks globalization period,” he observed.

Price pointed out that 30 years ago, American, Canadian and Western European baby boomers in their 20s and 30s were making more than they were spending — they were saving money, in other words.

“And they put that money into the bank. It ended up in capital markets. It drove down the cost of capital,” he explained.

Now those people are retiring — half of them are 65 years old. They’re pulling out their savings to live their retirement years. As a result, no more cheap capital. Add in the fact that labour around the world is getting more expensive [and] it will be hard to get back to the way things were.

“So we don’t have cheap capital anymore. We don’t have cheap resources anymore. We don’t have cheap labour anymore. Therefore, inflation will struggle to remain at 2 per cent, unless somehow we empower the world with the kind of technology that raises their productivity. Some would say that’s possible, but I would say it’s going to take some time,” Price said.

“In the meantime, we’re going to get have to get used to higher interest rates and higher inflation.”