Thread by @JimboStanford

🧵Consumer prices fell 0.6% in 🇨🇦 in Dec., yr/yr CPI growth fell to 6.3% (from 8.1% in June). This is good. But lest anyone interpret this as evidence that Bank of Canada tightening is 'working', or relief is imminent, let's review the short history of this inflation. #cdnecon /2

Pandemic caused big breaks in global supply (not fully repaired yet) & big shifts in global demand (mostly, not fully, rebalanced). Govt stimulus maintained aggregate demand & prevented a depression. For a short time, demand exceeded supply (mostly due to constrained supply). /3

Quick phase-out of COVID supports then cut household spending power quickly; it is now below pre-COVID trend. Supply has rebounded but still not caught up to pre-COVID trend. We are currently in a situation where both supply and demand are below potential. /4

Combo of supply chain problems & sustained agg. demand gave companies in strategic sectors opportunity to increase prices & profits. Price rises in 15 key sectors in 🇨🇦 explain most of the rise in inflation. Profits (ALL from those sectors) surged to highest share of GDP ever. /5

That's NOT a story of overheated aggregate demand or an economy operating over-capacity. It's a story of greed taking advantage of chaos to profit at our expense. But conventional monetary theory has no remedy for greed. It knows how to discipline labour, not capital. /6

Meanwhile, the leading edge of inflation (almost entirely arising from those 15 strategic sectors) slowly spread into other prices, as all stakeholders tried to protect themselves. This gradual rise in core or super-core inflation still doesn't make it an excess demand story. /7

Workers, too, tried (unsuccessfully) to protect their real wages against rising inflation. But real wages are still falling yr/yr. This completely contradicts the story of an overheated labour market, labour shortages & wage-price spirals that dominates the orthodox narrative. /8

Now those initial impetuses for inflation are abating. Energy prices in particular (the biggest source of the initial CPI surge) are down sharply. Other supply-chain-driven price rises (building supplies, autos, minerals, some food) are also abating. So overall CPI has peaked. /9

This had virtually nothing to do with monetary tightening. Fear of world recession (a side-effect of synchronized global tightening) has undermined oil prices, sure. But history shows global energy price spikes always reverse anyway (as OPEC+ adjusts strategy and output). /10

In housing (the other biggest driver of post-COVID inflation) falling real estate prices (caused by higher rates) are offset by soaring mortgage debt charges & skyrocketing rents (both also caused by higher rates). At best, the impact of rate hikes on shelter costs is a wash. /11

The orthodox narrative says higher inflation expectations literally *cause* inflation (without ever explaining exactly how). Fears of recession (including 70% of firms, according to this week's Bank of Cda survey) certainly mean those expectations have fallen. #PyrrhicVictory /12

But core inflation & expectations of future inflation are both still over 2X higher than the Bank's target. And the fact a recession seems likely doesn't mean the Bank will stop hiking: they've made it clear they target inflation, not GDP or jobs. EXPECT MORE RATE HIKES AHEAD./13

The effect of past rate hikes is just beginning. Domestic final demand already shrank in 3rd quarter. Construction, consumption, some investment all falling. Only exports & historic inventory build (temporary) kept total GDP positive. The 'excess demand' story fails again. /14

Core inflation will gradually subside, following energy/housing/food prices down (just like they followed them up). Monetary tightening may accelerate that, but at enormous cost (recession, possibly a long one). So far the tightening has had zero direct impact on inflation. /15

A better response would have been to short-circuit initial profit-boosting price rises with price caps in energy, housing & other strategic sectors. Support supply chain recovery with more investment (not higher rates). Protect vulnerable Cdns until transitory factors eased. /16

Orthodox monetary policy couldn't see the true causes (they're trained to view all inflation as wage-driven), and couldn't contemplate the idea of disciplining capital. The immediate cost of this myopia will be job loss, recession & associated human costs (scarring, suicide). /17

The long-term cost will be restoration of harsh NAIRU thinking, which will keep unemployment needlessly high for years to come. Mr Macklem has already said unemployment must be lifted (6%? 7%?) to keep the economy 'sustainable'. This will now guide macro policy for years. /18

Conclusion: Don't credit Bank of Cda for falling inflation. It was happening anyway; monetary policy has had no net impact so far on 🇨🇦 prices. A looming recession IS reducing expectations of future inflation (and WILL reduce prices). But that's a losing cost-benefit proposition.