Inflation has many concerned, and it's a complex issue. So I'm happy to share some results of work with my colleague, Prof. Sonja Chen: papers.ssrn.com/sol3/papers.cf… Not yet peer-reviewed, but there's some interesting results I'll preview here. 🧵 #cdnecon#cdnpoli
First, it's important to appreciate that rising inflation is accounted for by a few specific items. Had energy and shelter prices, for example, not increased then overall inflation would have been 4.1% in July rather than 7.8%.
More interesting is the spillover effect of energy prices on other goods and services. We find roughly one-quarter of items move up and down strongly with oil prices. And those items account for 60% of the non-energy inflation we're seeing.
This suggests to us that supply-side factors (i.e., the cost of producing goods and services) are potentially more important factor than demand (i.e., higher spending by individuals and businesses).
There's a broad debate about whether the inflation we're seeing is supply-driven or demand-driven.
Luckily, it may be possible to use data to tell the difference between the two. We try to do that in Canada following some recent work by Adam Shapiro: frbsf.org/economic-resea…
The intuition is straightforward. If demand rises, then prices go up *and* quantities purchased goes up. But if prices are rising because of a supply shock, then prices go up but quantity goes *down*. en.wikipedia.org/wiki/Supply_sh…
The trouble is CPI doesn't have good quantity data. But another data source that tracks CPI very closely does! We use that. It's the Canadian version of "PCE Inflation" in the United States. bea.gov/data/personal-… It has price and quantity data for ~100 items.
Details in the paper linked to above if you're interested (and feedback is welcome!). The main results are clear: demand was a big factor early on (see 2021) but over the past few quarters the increases have been largely supply-driven!
And for individual items, here's the top contributors to both demand-driven inflation and supply-driven inflation over the past year. Fuel and food appear to be supply-driven, and large contributors. Home owner costs ("imputed rent") top the demand-side list.
This is important to understand. If true, then much of the underlying cause of recently accelerating inflation don't seem to be due to "money printing" as some might think, or government spending / income support programs.
This doesn't mean there isn't a role for policy -- both fiscal and monetary policy matter. And tighter monetary policy through raising interest rates is what central banks globally are doing now to bring inflation down. Will that be effective? We try to shed light on this too.
Separating items between those that are responsive to interest rates (based on bankofcanada.ca/wp-content/upl…) and items that generally have persistent price changes, we find a potentially encouraging result.
What's this figure mean? It suggests that most of the high inflation is accounted for by items that tend to have just temporary price changes or are sensitive to interest rates (where demand is ~ half the issue).
To be clear, this isn't a prediction about what will happen. But the analysis might be helpful to better understand what's going on today. Especially since much public commentary on inflation isn't as data-driven as a topic like this deserves.
Of course, lots more to understand and note this is not yet peer-reviewed so a referee may catch an error. (Feedback welcome; wonkier the better!)
Some in AB's Govt are saying the surplus is due to "fiscal discipline".
All govts will spin, of course. That's what politicians do. But this claim is way off. 🧵
Quick note to start: I'm interpreting the claim of "fiscal discipline" as deliberately, and in some case explicitly, setting up a contrast w/ former govt.
Obviously if we spent 500b digging holes and filling them in again we'd have a deficit; so "discipline" has a role.
So the question is whether the current government's spending plans, which were indeed lower than the previous government's, is the reason for the surplus.
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.
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.
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.
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.
Average consumer prices in January 2022 were 5.1% higher than a year earlier. Highest since 1991. Excluding energy, prices were 4% higher. www150.statcan.gc.ca/n1/daily-quoti…#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.