Inflation is the steady climb in prices for goods and services, shrinking what your money can buy over time. It arises when too much money chases too few goods, a dynamic fueled by policy missteps and economic shocks. This essay examines inflation’s primary drivers, emphasizing government spending and money printing, with a focus on Canadian examples, including recent actions, grounded in hard evidence. The stakes are high: inflation corrodes savings, disrupts planning, and frays societal unity, demanding a clear-eyed look at its causes.
Government spending, especially when deficit-financed, is a key inflationary culprit. Large-scale fiscal interventions—like Canada’s $500 billion in COVID-19 relief programs in 2020–2021, including the Canada Emergency Response Benefit (CERB)—flooded the economy with cash, spiking demand. This surge, coupled with supply constraints, drove Canada’s inflation to 8.1% in June 2022, a 40-year high. A 2022 Scotiabank analysis estimated these programs added 0.45 percentage points to core inflation by widening the output gap. Historically, Canada’s 1970s deficit spending, which fueled double-digit inflation, mirrors this pattern. Recent policies, such as 2025 provincial and federal inflation-relief transfers, risk further stoking demand, with Scotiabank projecting they could necessitate a 38% share of the Bank of Canada’s rate hikes to counteract their inflationary impulse.
Money printing, through central bank policies like quantitative easing, devalues currency by expanding the money supply. In Canada, the Bank of Canada’s purchase of $400 billion in government bonds during 2020–2021 lowered interest rates to 0.25%, encouraging spending but devaluing the Canadian dollar. This imported inflation, as a weaker dollar raised import costs, contributing over 50% to inflation in final domestic demand by late 2022. Zimbabwe’s hyperinflation in the 2000s, peaking at 79.6 billion percent monthly, offers an extreme parallel, driven by unchecked money creation. In 2024, the Bank of Canada’s continued quantitative tightening, alongside a 2025 policy rate hold at 4.5%, reflects efforts to curb these pressures, though global factors like U.S. inflation still amplify Canada’s import-driven price hikes.
Supply shocks and wage-price spirals further aggravate inflation. Canada’s 2022 supply chain disruptions, exacerbated by global port delays and China’s COVID-zero policy, spiked food and energy prices—food alone contributed 1.02 percentage points to inflation. The 1973 OPEC embargo, which quadrupled oil prices, offers a historical parallel, as does Canada’s 2022 experience with Russia’s invasion of Ukraine, which drove gasoline prices to $2 per liter. Wage-price spirals, fueled by 4.5% wage growth in advanced economies in 2021, also played a role, with Canada’s labor shortages post-reopening pushing service prices up 5% by mid-2022. Current U.S. tariffs on Canadian goods, as of January 2025, threaten to raise import costs further, with uncertain pass-through to consumers, potentially sustaining inflationary pressure.
Inflation’s corrosive grip—evident in Canada’s 2022 peak and lingering 2.6% rate in February 2025—demands accountability. Government spending and money printing, as seen in Canada’s pandemic policies and bond purchases, are potent drivers, amplified by supply shocks and wage dynamics. Historical and recent evidence, from 1970s deficits to 2025 tariff risks, underscores the need for disciplined fiscal and monetary policy. Citizens must demand restraint to protect purchasing power and preserve economic stability before inflation’s tide engulfs us all.
Bibliography
- Congressional Budget Office. (1980). The Economic Effects of Federal Deficits. https://www.cbo.gov/publication/21925
- Energy Information Administration. (1974). Historical Overview of the 1973 Oil Crisis. https://www.eia.gov/history/
- European Central Bank. (2019). Asset Purchase Programmes. https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html
- Federal Reserve Bank of San Francisco. (2021). Fiscal Policy and Excess Inflation During the Pandemic. https://www.frbsf.org/economic-research/publications/economic-letter/2021/may/fiscal-policy-and-excess-inflation-during-pandemic/
- International Monetary Fund. (2009). Zimbabwe: Hyperinflation. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Zimbabwe-Hyperinflation-22603
- OECD. (2022). Employment Outlook 2022. https://www.oecd.org/economy/employment-outlook/
- Scotiabank. (2022). Canadian Inflation: Mostly Temporary and Foreign, But Pandemic Programs Have a Major Impact on Policy Rates. https://www.scotiabank.com
- Statistics Canada. (2024). High Inflation in 2022 in Canada: Demand–Pull or Supply–Push?. https://www150.statcan.gc.ca
- The Globe and Mail. (2022). The Most Important Source of Canada’s Inflation: The Government Borrowed More Than $700-Billion. https://www.theglobeandmail.com
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3 comments
July 3, 2025 at 9:08 am
Sumi
Your assumption is that inflation is bad: “inflation corrodes savings, disrupts planning, and frays societal unity.” Why is it then that capitalist economies fear deflation more than well controlled inflation? Why do both the US Federal Reserve and the Bank of Canada maintain a long-standing inflation target of two percent?
Does inflation corrode all savings? What if like many Canadians, my savings consist primarily of increased property value? If I take out a fixed-rate mortgage and pay it off over decades, don’t those payments get easier as inflation erodes the value of the mortgage and my pay rises accordingly? Don’t business loans work the same way?
Doesn’t inflation help drive consumer demand? If I know prices will stay the same or go down, what incentive do I have to buy now? If consumers put off spending, doesn’t that reduce aggregate demand, leading to less production, lower profits, layoffs and a faltering economy?
Are governments the only drivers of inflation? Doesn’t a shortage of consumer goods, such as we saw during and following the Covid pandemic, also drive inflation? What about corporate profit-taking and price gouging?
It’s not clear to me that inflation is necessarily bad or that so-called “fiscal restraint” will make matters better. Austerity policies in the UK, for example, have made life worse for the bottom of society in order to provide tax cuts to the rich. The same dynamic has been playing out for years in the US, and to a lesser extent, in Canada. History shows there are few drivers of frayed social unity more potent than rising inequality.
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July 3, 2025 at 2:03 pm
The Arbourist
@ Sumi
Inflation is a multifaceted economic phenomenon that cannot be universally labeled as “bad.” Admittedly in this essay I have focused on the negative aspects of Inflation and what it can do to countries.
While high or erratic inflation can erode savings, disrupt financial planning, and strain societal unity, moderate inflation—around 2%—is often seen as beneficial because it encourages spending and investment, fostering economic growth. This is why central banks, such as the US Federal Reserve and the Bank of Canada, target a 2% inflation rate. Deflation, on the other hand, is feared more in capitalist economies because it can lead to a vicious cycle of falling prices, reduced consumer spending, decreased production, and widespread unemployment, as seen during the Great Depression. Thus, controlled inflation is preferred as it balances economic stability with growth, avoiding the stagnation that deflation can cause.
Regarding savings, you’re correct that not all forms are equally affected by inflation. Cash and fixed-income assets lose purchasing power over time, but assets like property can appreciate, potentially offsetting inflation’s impact. For Canadians with property-heavy savings, this can be a hedge, especially if they have fixed-rate mortgages. As inflation rises, the real value of the mortgage decreases, and if wages keep pace, payments can feel easier over time. However, this benefit is not guaranteed, as rising living costs can offset gains, and property markets are subject to fluctuations. Similarly, business loans can see reduced real burdens, but the overall economic environment must be considered, as high inflation can also increase operational costs.
Inflation can indeed drive short-term consumer demand by prompting people to buy before prices rise further, but its long-term effects are more complex. Sustained high inflation reduces purchasing power, which can dampen demand over time. Additionally, inflation is not solely driven by government actions. Supply shocks, such as those during the COVID-19 pandemic, and corporate behaviors like price gouging also play significant roles. While governments play a significant role through fiscal and monetary policies, they are not the sole culprits.
Finally, regarding fiscal restraint, it’s true that austerity measures can have detrimental effects, particularly on the most vulnerable populations, as seen in the UK. However, unchecked government spending and money printing can fuel inflation, which also disproportionately affects the poor. The challenge lies in finding a balanced approach that controls inflation without exacerbating inequality. History shows that rising inequality can indeed fray social unity, making it crucial to address both inflation and distributional issues in policy-making.
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July 3, 2025 at 2:03 pm
The Arbourist
@ Sumi
Inflation is a multifaceted economic phenomenon that cannot be universally labeled as “bad.” Admittedly in this essay I have focused on the negative aspects of Inflation and what it can do to countries.
While high or erratic inflation can erode savings, disrupt financial planning, and strain societal unity, moderate inflation—around 2%—is often seen as beneficial because it encourages spending and investment, fostering economic growth. This is why central banks, such as the US Federal Reserve and the Bank of Canada, target a 2% inflation rate. Deflation, on the other hand, is feared more in capitalist economies because it can lead to a vicious cycle of falling prices, reduced consumer spending, decreased production, and widespread unemployment, as seen during the Great Depression. Thus, controlled inflation is preferred as it balances economic stability with growth, avoiding the stagnation that deflation can cause.
Regarding savings, you’re correct that not all forms are equally affected by inflation. Cash and fixed-income assets lose purchasing power over time, but assets like property can appreciate, potentially offsetting inflation’s impact. For Canadians with property-heavy savings, this can be a hedge, especially if they have fixed-rate mortgages. As inflation rises, the real value of the mortgage decreases, and if wages keep pace, payments can feel easier over time. However, this benefit is not guaranteed, as rising living costs can offset gains, and property markets are subject to fluctuations. Similarly, business loans can see reduced real burdens, but the overall economic environment must be considered, as high inflation can also increase operational costs.
Inflation can indeed drive short-term consumer demand by prompting people to buy before prices rise further, but its long-term effects are more complex. Sustained high inflation reduces purchasing power, which can dampen demand over time. Additionally, inflation is not solely driven by government actions. Supply shocks, such as those during the COVID-19 pandemic, and corporate behaviors like price gouging also play significant roles. While governments play a significant role through fiscal and monetary policies, they are not the sole culprits.
Finally, regarding fiscal restraint, it’s true that austerity measures can have detrimental effects, particularly on the most vulnerable populations, as seen in the UK. However, unchecked government spending and money printing can fuel inflation, which also disproportionately affects the poor. The challenge lies in finding a balanced approach that controls inflation without exacerbating inequality. History shows that rising inequality can indeed fray social unity, making it crucial to address both inflation and distributional issues in policy-making.
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