The History of Inflation (and everything about the economy during COVID-19)

Over the course of history, prices for the things we buy have increased significantly. Why? Well, it all starts with inflation. Inflation is a general rise in the price level of an economy over a period of time. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

To see such a change from the 1940s and in the 2020s, the value of $1 back then is currently $19.23.

Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they payback is worth less than the money they borrowed.

But what about wages? In theory, raising the minimum wage forces business owners to raise the prices of their goods or services, thereby spurring inflation. However, small minimum wage increases do not lead to higher prices and may actually reduce prices.

As money is a social construct. The banks give money value and we as consumers, trust the banks and view that money as that value too. So if the cost of carrots increases, then the value of the carrot increases as well.

Now with the COVID-19 pandemic, possibly everywhere that you go there has been some increase in the necessities or things you buy. This begs the question, will the economy suffer once more like the Great Depression? Or will the Canadian economy boom?

After the war, there were bouts of inflation, but the real economy grew strong enough to keep up with price rises. Resources used for the war effort were put back into peacetime production. Then from the mid-1960s, a gap between real growth and the influence of inflation opened up. The economy overheated. First, the output gap, which measures the economy’s capacity to produce enough stuff in relation to the demand to consume it, went negative as demand outstripped supply. Then, in the late 1960s, excess demand turned into a long trend toward increasing oversupply. As inflation rose, the labour force grew and people demanded higher wages.

Currently, in Canada, prices have increased. Want to buy a car? That has increased by 5% more than one year ago. But there is nothing to fear of, the Bank of Canada, which is responsible for maintaining inflation, says the spike is nothing to fear — the run-up in prices is temporary and largely reflective of an economy rebounding from a year of lockdowns and reduced activity.

Crude oil has risen up drastically in the past months but is expected to return to pre-pandemic costs by 2022. As the cost of gasoline changed similarly following the 2008 recession, though it typically has little impact on inflation in the broader economy. Random fluctuations are normal for oil.

Don’t forget to keep in mind, the central bank has said it expects inflation to remain around 3% over the next several months before diminishing later in the year.

But what about housing? Real estate prices have soared during the pandemic, propelled in part by low interest rates and rising demand. Toronto home prices jumped almost 30% in May, to $1.11 million, while smaller cities and rural areas have seen increases as high as 50% in one year.

The conclusion? There is a chance that the economy will return to normal after the pandemic (with time). However, things are slightly uncertain as the globe is still in the midst of a crisis.