What Will Be The Value Of Money In 1-3 Years?
In an effort to combat COVID-19’s economic shutdown and the oil price shock, the Bank of Canada has pumped BILLIONS of dollars into the economic system.
The question on my mind is …how will this affect the value of money in the future? What is the direction of inflation, deflation, stagflation?
Quick Definitions
Quick review of terms …inflation is the rise in price of a basket of goods. Our economists like inflation to be low, stable and predictable.
Deflation is the reduction in price of a basket of goods. Deflation happens when the inflation rate dips below 0%.
Stagflation, an economists nightmare, is when economic activity is low (high unemployment) and inflation is high.
The Bank of Canada’s monetary target is low and stable inflation in the 1-3% range, ideally targeting 2%.
The Key Overnight Lending Rate, amongst other monetary policy muscles the Bank of Canada has been flexing recently, is the main policy tool used to adjust for inflation. Movements up or down of this policy rate help adjust Canada’s economic ship to stay pointed at the 2% inflation target.
NOTE: The BoC dropped the Key lending rate by 1.50% in March!
With this bit of context, here’s what’s projected inside the April 2020 Monetary Policy Report.
Bank of Canada Inflation Estimates
A common theme throughout the April 2020 Monetary Policy Report (MPR) is the “outlook is uncertain“. RE: the economy could go one of many ways.
I can’t help but imagine Canada’s central bankers pushing away from the board room table, throwing their hand ups, shrugging their shoulders, and admitting they don’t know what’s to come!
As the title of Chart: 12 suggests, how low or long inflation remains below the 2% target is anyone’s guess.
Deflationary Pressure
The MPR goes on to explain Canadians will likely use less gasoline and book fewer flights, which will result is lower inflation indicators of these categories.
In the case of inflation staying lower for longer, that would be the result of a return of supply side metrics that outstrip demand.
For example, if restaurants resume business and consumers do not respond in the same manner, perhaps out of fear of COVID, inflation of the lower bound in Chart: 12 would persist.
Leading up to our current crisis, I was hearing more reasons why Canada’s inflation was not much higher than the 2% target.
One reason is baby boomers, who are entering the retirement phase of life, are spending less on consumer goods. Their prime years of employment earning power are behind them and thus spending less.
Another reason for less than stellar inflation numbers, that I was hearing, is global outsourcing of work in the financial/services sectors. Have you ever used the website Fiverr.com?
Inflationary Pressure
On the other side of the coin to estimate the direction of inflation …the reduction of global oil prices has resulted in a reduction in the value of the Canadian dollar. A lower Canadian dollar will make imports more expensive, and raise prices in some of these categories which is upward pressure on inflation.
The upper bound of the inflation outlook is also possible. This would result from the less likely scenario that demand outstrips supply as the economy is re-opened. This would be the release of pent up consumer demand combined with significant economic stimulus, while simultaneous supply restraints stoke the pressure. Example: line ups a restaurants, people clamouring to fly overseas for vacation etc.
I can’t help but think the volume of fiat currency that is created in times like these will not somehow lead to inflation? Money is being printed, and created to support our economy. The value of our currency is simply a belief. It’s not real.
Consumer Spending Shift?
I’m having many conversations with clients and friends about how little they are spending during the shelter in place order. Some are seeing how frivolous spending on coffee or meals out (etc.) add up over time.
Let’s remove the fear of COVID for a second and assume there is a vaccine created, manufactured and distributed throughout the world. It is possible consumers simply choose to spend less so they replenish savings or pay down consumer debt? A shift is consumer psychology could be upon us?
You!
I’d like to hear from you. What are your plans when the economy is slowly re-opened for business? Are you feeling like you have pent up consumer demand? Will you race out to purchase a new vehicle, dine out, or go spend at stores? Comment below.
Thanks for reading,
Chad Moore
chad@canadamortgagedirect.com
403-809-5447
