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Tiff Macklem, Governor of the Bank of Canada
Photographer: Justin Tang/Bloomberg via Getty Images

BoC’s Macklem doesn’t want to repeat the inflation-fighting mistakes of the 1970s

As a teenager growing up in the 1970s, Tiff Macklem said he recognized the impact high inflation was having on everyone: “Inflation made everyone angry.”

Today, as Governor of the Bank of Canada, Macklem has vowed not to repeat the policy mistakes of the 1970s in tackling high inflation.

That means “staying the course” in the current battle to ensure inflation expectations don’t become entrenched in the economy.

“The 1970s showed us the very high cost of entrenched inflation, and we know we need to avoid that danger this time around,” he said on Wednesday in prepared remarks to the Saint John Region Chamber of Commerce.

He noted that the government and central bank of the day “weren’t willing to stay the course” to restrain government spending and tighten monetary policy enough to rid the economy of inflationary pressures.

Canada’s headline inflation rate soared to 12.3% by 1974 before reaching a peak of 14.8% in 1980, and sending 10-year inflation expectations to above 10%. It eventually took a double-dip recession in the early 1980s to finally unwind those expectations.

“By the time policy-makers realized they needed more forceful action, inflation was entrenched in the economy,” he said. “So Canadians lived with high inflation for more than a decade.”

That’s what the Bank of Canada wants to avoid this time around, Macklem said.

By comparison, the recent peak of headline inflation at 8.1% in June 2022 was comparably modest, but still well outside of the Bank of Canada’s comfort level and its neutral target range of between 2% and 3%.

“I am confident we will get back to low inflation more quickly and at lower economic cost than we did in the 1970s,” Macklem said. “We have learned the bitter lessons from that time.”

High interest rates are painful, but high inflation is worse

But that doesn’t make the current situation of decades-high interest rates any easier for Canadians, Macklem acknowledges.

He said he understands the pain being felt by families, many of whom are changing spending habits. He added that the impacts of inflation are especially hard on lower income Canadians who tend to spend more of their income on necessities and have less flexibility in switching to cheaper alternatives.

“When people are spending more of their income on necessities, it’s hard to shift what they need to buy, and they have little savings to buffer higher prices,” Macklem said.

Meanwhile, high and unpredictable inflation is impacting businesses, making agreements on fair compensation more difficult—which can lead to more strikes—along with shorter contracts and higher uncertainty for all parties.

Public sentiment at levels seen during the financial crisis

The end result has been a sharp drop in public sentiment to levels last seen during the financial crisis of 2008-09.

“This is despite the fact that the job market is stronger today and the unemployment rate is lower than it has been for most of the last 40 years,” Macklem said.

In addition to the high cost of living, he attributed some blame to lingering “weariness” from the pandemic, the rapid pace of change brought on by technology, rising conflicts and climate change that have contributed to higher levels of anxiety.

But Macklem said he remains optimistic that inflation is coming back under control and that Canadians can look forward to a return to more normal conditions following this period of high rates and slow growth.

“By responding forcefully, we’ve cooled our overheated economy and taken the steam out of inflation,” he said. “To return to low inflation and stable growth in the years ahead, we need these higher interest rates and slow growth in the short term.”


Featured image: Justin Tang/Bloomberg via Getty Images