Trevor Tombe Profile picture
Jun 23 13 tweets 4 min read
Today's high inflation is regressive. This point has been made by many, but I thought some numbers might help. 🧵 #cdnecon
I estimate the effect of price increases on household disposable incomes here 👇. The high rates for May (reported today) are like a nearly 10 percent reduction in the disposable incomes of the lowest income families. Let that sink in a moment.
This is not because lower-income households buy more items w/ big price increases. The reverse is true (owned accommodation, for example).

Here's a set of estimates of the inflation rate for different types of households based only on differences in products purchased.
Instead, it's regressive today because the share of income saved (i.e., not buying stuff) rises with incomes. Accumulating debt (negative savings) to make ends meet also falls with income. So price increases will lower real disposable incomes more at the low end.
So when governments consider measures to support families struggling, it's especially important to target those measures appropriately.

How much income support might be required to offset the inflation hit?
I also estimate the dollar value of the inflation hit to households. On average, I estimate it's as though household disposable incomes have fallen nearly $400 per month! Across Canada, that's like a $6 billion total hit every month.
To insulate families earning less than 30k, they'd need a ~$200 per month transfer. Total fiscal cost: $500 million per month.

To insulate families earning less than 60k, total fiscal costs rise to $1.5B/month. And for families earning less than 90k, costs are ~$2.3B/month!
These large values make is clear it's difficult for government to fully insulate households. Partial measures are less costly, and so far what governments are doing. These estimates reveal the significant financial effect of the 7.7% inflation rate.
But we must not neglect that the largest driver (by far!! i can't stress this enough!!) is high energy prices. With rising oil and gas profits, the federal corporate income taxes are rising significantly.
Perhaps the feds can do a detailed accounting of the oil and gas windfall that may be in store, and redirect all of that to special targeted cash transfers. It might be a lot. I suspect (envelope math) somewhere between $500 million and $1 billion per month.
Income supports are perhaps the most direct way governments can help. Especially since much of what's behind inflation is beyond govt's (short-term) control.

Others (like @MikePMoffatt and @kevinmilligan) have some interesting ideas. But effects are small.
Wonk aside: this isn't easy to estimate. But Statistics Canada not only does a great job with data collection and reporting, they also make this tax policy tool:… So I merge the CPI products with SPSD/M and simulate price changes like an excise tax.
The product categories aren't a perfect match, so I made several judgement calls. I think these results are very informative!

TL;DR: High inflation is bad, and today it's highly regressive. But there's no easy or cheap way forward for governments.


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More from @trevortombe

Jun 22
Inflation pressures are broad-based, to be absolutely clear, but this is worth noting: if shelter and energy prices remained flat since last year, I estimate headline inflation would have been 3.2% in May instead of 7.7%. #cdnecon
This is not to deny the financial pressures that price increases create. But it shows that the biggest pressures are narrowly concentrated. This may matter for policy makers trying to figure out where to direct efforts and to understand what is going on.
Also worth noting, this doesn't account for the spillover effects of rising energy prices on goods and services throughout the economy. This is hard to estimate, but my best attempt is that this may add another 1-1.5 points on top of energy's direct 2.5 point contribution in May.
Read 4 tweets
Mar 16
Today's data: inflation! 📈 CIP increased by 5.7 percent in February compared to one-year earlier; 4.4 percent if energy excluded.… #cdnecon
Price increases are also broad based across many product categories. Approximately two in three items within the CPI saw price increases above 3%.
What's behind the acceleration of inflation? Two years ago, the rate was close to 2% (near the target). The increase to 5% is due to just a few items: groceries, gasoline, home depreciation, fuel. Here's an illustration.
Read 7 tweets
Feb 24
This time last year, Alberta was anticipating an $11b deficit for 2022/23. Now, the government expects a surplus of $511 million ($2.3b excluding contingency).

Massive turnaround. Here's a decomposition of the relevant changes. #ableg
There will be two competing stories out there. Both have elements of truth.

1) The government had little to do with the improvement. It's all oil prices.

2) The government's fiscal/economic policies made today's surplus possible.
High oil prices increase both resource revenues and increase corporate income taxes. That's basically the whole ballgame relative to where Budget 2021 was projecting for 2022/23.

Not due to government.
Read 9 tweets
Feb 16
Today's data: inflation! 📈

Average consumer prices in January 2022 were 5.1% higher than a year earlier. Highest since 1991. Excluding energy, prices were 4% higher.… #cdnecon
What's behind the accelerating inflation rate? This visual might help. It decomposes the change in inflation due to several important components. Energy prices and household depreciation account for most of the change.
What's homeowners' replace cost (i.e., depreciation)? I explain here:…
Read 4 tweets
Feb 12
It's tough to know for sure what the largest tax increase in Alberta history was, but it was not the carbon tax. 🧵🤓 #ableg
First, some context. In Budget 2018 the carbon tax (just the retail levy, since I presume the UCP was not referring to the large-emitter carbon tax, which they support) was projected to be $1.5 billion by 2020/21.

That's approximately 0.4 percent of GDP. In 2017/18, it was 0.3.
I initially thought the largest tax increase would have been found back in Budget 1936 when we brought in a sales tax! That was two percent. Today that would be about 0.6 percent of GDP, so ... larger than than the CTax.
Read 12 tweets
Dec 14, 2021
Remarkable that following such a massive shock, federal debt services costs will average ~1.2 percent of GDP for 2021-2026. Budget 2019, prior to COVID, was projecting debt services costs of 1.2 percent from 2021 onwards.
Those claiming the fiscal sky will soon fall due to this federal borrowing are ... mistaken
Simple illustration: If beyond 2026 we have interest rates ~3 percent & NGDP growth ~4 & revenue/GDP is stable & real per capita spending is stable --> debt/GDP gets to pre-COVID levels by 2034. Far sooner than previous projections.

If spending/GDP is stable, then it's 2038.
Read 4 tweets

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