Food inflation across the country has been front and center on most individuals’ minds as prices have skyrocketed over the past year, leaving many demanding to know the causes and culprits responsible for such high prices.
The Standing Committee on Agriculture and Agri-Food investigated the problem and discovered several issues that have led to the rapid increases in food prices since 2020. The largest contributing factors they discovered were the international supply chain disruption, global price fluctuations, and the availability of key inputs in food production such as feed, fuel, fertilizer, and labour. All of these factors stemmed from the 2020-2021 COVID shutdown measures
Other causesinclude extreme weather events such as the record heat wave across Western Canada and the ‘flood of floods’ in British Columbia, as well as government trade tariffs imposed on Canadian fertilizer importers to penalize Russia for its invasion of Ukraine.
What the Committee didn’t find was evidence that would suggest that greed was a contributing factor. In testimony quoted in the Committees report, Dr. Charlebois, the head of the Agri-Food Analytics Lab—an independent organization consisting of several universities across the country—stated that his organization closely examined Canadian grocery chain profits from 2017, and failed to find “any evidence of profiteering”.
The one area that the Committee did not examine was the role the Bank of Canada had played.
The Bank of Canada is responsible for managing Canada’s monetary policy, with its primary role being to maintain a stable inflation rate. Typically, the Bank keeps the inflation rate around 2% in order to support economic growth and stability. It also monitors and assesses risks to the financial system, and works to promote a stable financial environment. During times of financial strain, the Bank of Canada provides liquidity to financial institutions to help maintain overall financial stability in the economy. While it operates under the authority of the federal government and must report to Parliament, it makes its monetary policy decisions independently. This independence is to ensure that monetary policy is based on economic objectives rather than short-term political considerations.
On April 15, 2020 the Bank of Canada announced it has “taken measures to improve market function so that monetary policy actions have their intended effect on the economy.” The Bank proudly promoted that they (1) lowered the overnight rate to its lower bound; (2) conducted lending operations and asset purchases of $200 billion; (3) embarked on a $5 billion per week purchase of Government Securities; (4) increased its acquisition of Treasury Bills by 40%; (5) acquired $10 billion in investment grade corporate bonds, as well as a few other actions. In other words, the Bank of Canada increased the amount of money circulating in the economy (also known as “quantitative easing”). At the time, the Bank of Canada declared its actions were “aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.”9
Canadian Consumer Price Index for food (CPI-Food) between 2020-2024, indicates food prices were actually declining as of April 15, 2020 (point A) and continued to decline until April 2021. Normally it takes between 18-24 months for monetary policy to take effect, In this case, food prices, as well as the price of all-items, began to increase (point B) within a year and would continue to grow; reaching a maximum of 11.4% by January 2023.
To put the Bank of Canada’s actions into perspective, reviewing Canada’s money supply during the same period. The money supply, regardless of which measurement one prefers, is consistent between 2018 and 2020. However, between 2020 and 2021 the growth rate more than tripled, reaching around 30% for currency outside banks plus personal and non-personal chequable deposits held at chartered banks (also known as M1+).
While the scale of quantitative easing may have been unusual, the inflationary reaction to an increased money supply is consistent. By the end of 2022, money supply growth rates had returned to normal and even fell into negative territory, which corresponded with the slowdown and eventual decline in the Consumer Price Index.
While consumers and political officials may find it tempting to embrace the widely circulated idea that greed is the root cause of inflation—often referred to as “greedflation”—a closer look at basic economic principles and the governance of the money supply suggests otherwise. The real drivers of inflation are far more tied to governance decisions (or lack thereof) and the actions of the Bank of Canada, rather than a simplistic portmanteau that swirls around mainstream and social media.