Inflation 2021 | General financial discussion | Discussion forum

Inflation is in large part, the product of expectation of inflation (I will not explain why again, is getting annoying for forum members). If people believe there are higher inflation in the environment when we have huge money supply, it could lead to higher inflation.

Interest rates aren't going to change if the increase in inflation doesn't look like it will stay.

According to Understanding inflation targeting, Bank of Canada does not set interest rates based on what inflation is today:

But it takes some time (usually between 18 and 24 months) for changes in interest rates to affect every part of the economy. So we set the policy interest rate based on where we expect inflation will likely be in about two years, not where it is today.

US Federal Reserve has also said they stopped targeting current inflation as well. Instead, average inflation of 2% is the goal. So, having a year or two of 3% inflation is acceptable after a year or two of 1% inflation.

Deflation, a guess about what happens, from history, in my opinion.

Business inventory levels balloon/turnover ratios slow as a low number of buyers show up, being fed up with prices, and/or unable to buy, and losing interest in buying anything but essentials. No name food brands predominate. Fear about the future.

Business cash flow dries up, especially high ticket item businesses (autos, big ticket electronics) or maybe about anything except survival items. Bankruptcies happen, obviously. Big discounts available to try and attract cash flow. Cash (that's us?) is King.

Deflation tends to be a temporary condition, but leaves many victims, and a few huge winners. Price reductions eventually bring out, first, cash volume buyers intent on flipping product, then anyone else with cash awakes and shows up for discounts. However overall recovery is anything but instant, as the core problems that started all this never went away.

We are at 1% inflation. We won’t see interest rates go up until we hit at least 2.5% and for a few months too.

I continue to think interest rates as a tool is shelved for some time. BoC said this;

" Bank of Canada governor Tiff Macklem said he has no plans to raise interest rates until the economy and employment are back on track, and that will likely take until 2023. But there are signs it could be distorting the residential real estate market. Some observers have already expressed worries that the Canadian housing market is rising at an unsustainable pace, leaving critics — including some in the real estate industry — nervous of a boom, followed by a devastating bust once interest rates finally start to rise. "

Rather than rate increases which would tank the emerging economy, I look for a return to having some real estate and/or mortgage restraint tool used to try and cap the bubble, although those don't work very well.

I Agree with Dougjp. A rate increase could be devastating because everyone has gotten used to rock bottom rates for a year now. Even a small increase is a massive difference for debt servicing. It’s too bad that rates weren’t normalized before this pandemic, as a small increase from much higher rates is not much of a difference and wouldn’t impact so severely. That’s why we will be in a serious situation where a choice will need to be made between inflation or debt servicing. I’m glad I don’t have to make that call.

My guess is inflation will trump debt servicing, I think historically that's usually the winner. For one, inflation is a great way of making existing debt amounts easier to pay off. Two, we voters have shown no inclination to elect anyone who talks about paying off debt, about belt-tightening, we way prefer those who promise to keep and even expand spending. And I suppose as long as we're not more profligate than the Americans hopefully our currency should keep step with theirs.

Bill said
My guess is inflation will trump debt servicing, I think historically that's usually the winner. For one, inflation is a great way of making existing debt amounts easier to pay off. Two, we voters have shown no inclination to elect anyone who talks about paying off debt, about belt-tightening, we way prefer those who promise to keep and even expand spending. And I suppose as long as we're not more profligate than the Americans hopefully our currency should keep step with theirs.  

I’m thinking the opposite! Out of control inflation is a nasty situation while debt issues can be dealt with by lifestyle changes. I would definitely say that I would raise the inflation target to accommodate a bit higher inflation before interest rates should be increased, but I definitely would not allow debt loads to determine interest rates, inflation has to be contained.

Edit: I read your post again and it appears a bit conflicted. I think you mean Debt Servicing will trump Inflation and be more important to the masses. Meaning rates will stay low regardless of inflation.

Vatox, I meant the impulse to inflate rather than deflate will be stronger, is my guess. Seems to me cases of runaway inflation are more common that deflation in other 3rd world, etc economies, even Germany between the wars was mainly ravaged by runaway inflation. Canada had much higher inflation a few decades ago, there was no talk of deflation, i.e. the people, ergo the gov't, preferred (then versions of) money-printing, spending and borrowing over restraint, cuts, etc.