You’re not imagining things.
Prices are going up all over.
Among the most conspicuous examples is Toronto pump prices, which have roughly doubled from their low point in the pandemic.
We worked hard to reopen the economy, adhering to the COVID-19 safety rules, and now boast of one of the best vaccination records in the world.
But are we going to have to pay for a return to normality with a higher cost of living?
Are we in for a nasty bout of inflation that has already boosted the prices of food, fuel, housing and vacations?
Even worse, should we brace for higher interest rates on credit-card balances and mortgage payments?
Thankfully, the answer is no, at least in the long term.
This too shall pass, probably in about a year.
In the short term, though, we will have to endure higher prices, because supply is struggling to catch up with rampant demand.
These are not normal times. When an economy suddenly springs back to life, the recovery is studded with distortions.
For starters, Canadians amassed an unprecedented $212 billion in savings last year, compared with a negligible $18 billion in 2019.
Canadians wisely used some of those savings to pay down credit-card balances and other consumer debt, which was at near-record levels. But that still leaves the biggest storehouse to finance pent-up spending in history.
Another short-term distortion is that there seem to be shortages of just about everything.
That significant imbalance between buoyant demand and insufficient supply, causing sharp and rapid price hikes, is one of the biggest on record.
It rivals the post-Second World War spending boom, which took place over a decade. The current boom is more like an explosion.
Again, today’s disruptive conditions are temporary. They are to be expected of an economy that was strong before the pandemic and is returning quickly rather than gradually to that state.
But for now, those conditions are playing havoc with household budgets and business expansion plans.
Labour shortages are pushing up costs, which are passed on to consumers. That problem will ease with a resumption in high immigration flows and other factors.
A worldwide shortage of silicon chips, or semiconductors, has raised prices throughout our computerized economy. That shortage is most readily seen in vehicles, appliances and consumer electronics. Even the price of used cars has shot up almost 40 per cent.
And behind the scenes, the chip shortage is raising production costs in the industrial economy. Those higher costs also get passed to consumers.
Toronto gas prices that have soared from a pandemic low of 65 cents per litre to as much as $1.37 are likely to rise still further before they plateau.
That’s because refineries have been slow to return to full capacity. The same with oilfields, where severe production cuts were made as the pandemic market for transportation fuels dried up.
But producers everywhere are now ramping up output, from Alberta to Norway to members of OPEC.
That eventually will put downward pressure on pump prices, which by next spring should return to the pre-pandemic level of $1.06 per litre. They might even dip below that, depending on the staying power of the work-from-home trend.
Demand is currently outpacing supply in other basic commodities. These include lumber for backyard decks, nickel for smartphones and other computing devices, and cobalt for the 21st-century batteries that will power the revolution in electric vehicles.
And yet, no sooner did some experts predict a new “supercycle” of rising commodities prices earlier this year than the price inflation in commodities began to subside. Reality set in among commodities traders that millions of North Americans are still out of work.
And that, in turn, is partly due to a global supply chain still under repair after the damage inflicted on it by a lengthy pandemic. Canadian employers of every description are holding off on hiring and rehiring for fear that raw materials they’ve ordered from abroad might not arrive on time, or at all.
A huge part of that supply chain is ocean shipping. More than 80 per cent of the world’s export goods move on water, or more than $4 trillion (U.S.) worth of goods per year.
And many of the greatest ports, the ones that supply your closest Walmart, Costco and Canadian Tire with a large portion of their goods, have for months been hopelessly clogged.
In particular, the massive ports of South China and Southern California are bottlenecks, holding up the arrival of goods in Canada. Due to labour shortages and unprecedented port activity, it currently takes a week or more to unload a cargo ship, compared with the usual two days.
That backlog will be cleared by early next year. But, in the meantime, it’s another factor causing supply to fall short of demand, pushing up prices.
Finally, while the Bank of Canada is under pressure to raise interest rates to stave off resurgent inflation, it and other central bankers have held off from doing so.
True, inflation in Canada this year has averaged 2.3 per cent per month, hitting 3.6 per cent in May, compared with the 2.0 per cent target that central bankers aim for. The higher U.S. monthly average this year of 3.0 per cent results from U.S. stimulus spending greater than Canada’s.
The above-average inflation, while worrisome, is a sign of economic strengthening. That said, the economic recovery in North America is nascent and still considered fragile by central bankers. They won’t risk throwing a spanner in the recovery by raising rates prematurely.
The U.S. Federal Reserve Board, for instance, expects it won’t need to raise rates until late 2023. Bank of Canada rate-setting decisions are seldom out of sync with those of the Fed, given the integrated nature of the North American economy.
Some time ago, this space suggested that one way to curb the rise in home prices is to put off purchases until sanity returns to the market. As luck would have it, at least some of the irrational exuberance has since been drained from the GTA market.
In the same way, withholding your dollars — or economic “votes,” as economists say — from an overpriced market is one of the surest cures for price inflation. After all, the peace of mind that comes with an ample rainy-day fund is one of the lessons of the pandemic.
But you do deserve a vacation in cottage country. At this writing, GasBuddy.com says the Niagara region is easiest on your travel budget, with pump prices of about $1.21 per litre. And Muskoka, for now at least, is at the high end ($1.40).
Enjoy your summer. Stay safe.
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