When economist Mark Perry unveiled a graph in 2016 showing where inflation was lurking in the U.S. economy, it was quickly tagged as a candidate for “chart of the century.”
The chart, which simply broke down U.S. inflation rates by category, is now famous in financial circles for what it depicts about globalization, the benefits of international competition, and what’s at stake now that free trade is being unwound and protectionist policy is remaking the world order.
A Canadian version of the chart is no less fascinating. Over the past 25-plus years, inflation has been hottest in non-tradeable segments, including education and shelter, while tradeable goods have mostly come down in price, some dramatically so, such as electronics.
“We’ve had a period where globalization helped lower inflation for most tradeable goods and thus lifted the purchasing power of most households,” said Pedro Antunes, chief economist at Signal49 Research, formerly The Conference Board of Canada.
“A rise in protectionism will make it more challenging for the Bank of Canada and other central banks to keep inflation at target.”
One of the reasons this chart, and its updated versions, has been making the rounds for a decade now is because it tells so many different stories. Here are some of the big ones packed into the Canadian edition.
Free trade = cheap stuff
As barriers to international trade have steadily come down over the past few decades, the effect on consumer prices has been unmistakable.
Things like furniture, clothing and toys cost about as much, or less, than they did at the turn of the century, according to Statistics Canada’s pricing data. (While your favourite pair of jeans may have gone up over time, the price tags on these categories overall have stayed steady.)
For open economies like Canada’s, globalization “has imparted a steady disinflationary bias,” as production shifted to lower-cost producers and countries with cheaper labour, Mark Carney said in a 2017 speech, when he was running the Bank of England.
The effect is most dramatic when it comes to items like televisions, computers and other electronic devices, which have declined on the order of 85 to 90 per cent, after accounting for how technology has advanced over the years. A big-screen TV would have cost you much more than $1,000 in the early-2000s, for example. These days, you can pick up a high-definition smart TV that size for as little as $300. Statistics Canada further adjusts the sticker-price decline to account for the vast improvement in quality, to ensure they are comparing apples to apples.
Vehicle prices are also adjusted for quality improvements. But categories like clothing have seen prices decline on an absolute basis.
Free trade ≠ cheap services
The chart clearly shows what has been putting pressure on Canadian household budgets over the years. Costs in the service industries, like education and health care, have dramatically outpaced overall inflation. Same with shelter.
There are some common elements here. These industries are not subject to trade and international competition. There is a high labour component, such that rising wages drive prices up. And in some cases, the cost of regulation contributes to inflation, as well.
Food is a bit of an outlier. While labour costs play a role, food is largely an imported good that has seen major price increases in Canada. There is plenty to blame – climate change and extreme weather, lack of competition, heavy transportation costs, and deficiencies in the Canadian supply chain among them.
In a way, economic integration has helped dull the impact of high prices for things like food and education, which have been partially offset by the falling cost of trade-sensitive goods.
The globalization backlash
Since economic integration has helped dampen inflation in some respects, the protectionist forces gaining strength today risk sending the prices of goods higher in the years ahead.
Tariffs are inflationary. Economist Paul Krugman recently calculated on his blog that tariffs on U.S. imports are responsible for about 0.8 percentage points of U.S. inflation today. And that’s while the vast majority of Mexican and Canadian goods continue to flow into the country duty-free under the United States-Mexico-Canada Agreement.
Brexit may serve as a cautionary example. The exit of the United Kingdom from the European Union in 2020 caused food prices to rise by about 6 per cent over the following two years, according to a pair of studies.
Wages outpaced prices
Contrary to popular belief, Canadian wages have increased at a faster pace than inflation since the end of 1999.
This has become a heated issue in Canada, with many consumers feeling like the cost of living has gotten steadily worse, at the same time as economists point out that the average consumer is better off, with a higher income even after accounting for inflation.
Part of the discrepancy may lie in the income gap. Affordability issues are felt more acutely by those lower on the income scale, said Claire Fan, senior economist at Royal Bank of Canada. “Those that earn lower wages are also the ones that tend to be the most impacted by rising inflation on essentials like food.”
The corrosive power of inflation
Even after accounting for the inflation crisis of 2021-23, prices overall have tracked pretty close to target. Since the start of the 2000s, overall Canadian inflation amounted to about 76 per cent, which is only about 10 percentage points higher than it would have been if the Consumer Price Index rose by the 2-per-cent annual target each and every year.
The takeaway is that even modest inflation can have a major impact when it accumulates over many years. This is an especially important lesson for retirees, who generally need to plan for about 25 years of post-career finances, says Doug Porter, Bank of Montreal chief economist.
“Even if the Bank of Canada is largely successful in hitting its inflation target over the next 25 years, you’re going to have to accept that prices could rise by 70 per cent or more over that period.”