Who Pays the Most to Reduce Inflation?

by Terrance Hunsley

We are told that the Bank of Canada will follow the lead of the US and other countries by increasing interest rates. It is the standard central government response to inflation. Higher rates of interest mean fewer loans taken out and thus fewer purchases and therefore price moderation. Simple.

Except it isn’t. The biggest target of interest rate policy has a name which has been less-used of late but is still there as a remnant of monetary policy. It is called the NAIRU -Non-Acceleration of Inflation Rate of Unemployment. In other words, by increasing unemployment – which happens at the bottom end of the wage scale – you make low-wage workers less able to buy anything.  That makes them more willing to accept low wages which don’t make match inflation and thereby also dampen consumption. 

Now some will argue that lower income people are more affected by inflation, since the price hikes hit non-discretionary items like food, shelter and transportation, and they spend a higher percentage of their income on those items. True. But inflation in house prices, while raising the barrier for families to purchase, also contributes over time to the value of their investment. 

For the curious, surely the question arises: What is the affect on the people who lose their jobs or can’t find one? Unemployment insurance does not compensate them because of the barricade of rules and restrictions in the program. So they absorb major income losses and accept substandard work, which can set them into a life pattern of struggle, while the rest of us benefit. 

So why, when high interest rates do their job and curb inflation,  is this considered success?  Well, because it is good for “the economy” and for the people who have the higher level skills and can choose their jobs, and eventually make those house purchases.   And low, stable inflation is really good for investors. And that higher unemployment rate? It really helps to undermine the power of low-end workers to demand higher wages, and keeps those people who do the essential tasks under control. So we can still buy our bananas for next to nothing.

So why do we hear the grumbles about government spending on social programs which help those on low or no wages? (In fact most of our social spending is spread pretty equally across income groups.) Our economy and the bulk of middle and higher income people are being subsidized by policies which keep low wage workers down.

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