Forget rate hikes — these economists say to tame inflation, we need cheap oil
CBC
Rising interest rates will increase borrowing costs and slow the economy. But they won't address one of the biggest drivers of inflation: fossil fuel costs.
The chair of the U.S. Federal Reserve, Jerome Powell, took the dramatic step of increasing borrowing costs by 0.75 per cent, a move Canada is expected to follow. He said the move will slow demand and help get the jobs market balance out.
"But there are many things we can't effect," Powell told reporters this week in Washington.
"Those would be commodity price issues we're having around the world due to the war in Ukraine."
Inflation numbers in Canada released last month laid the facts out for all to see. Overall, the consumer price index was up by 6.8 per cent from the year before; 1.8 percentage points of this was due to energy overall, while 1.3 percentage points of it was due to gasoline alone.
So, about a quarter of April's growth in the price index was a direct result of energy prices. But even that doesn't capture the whole story.
"Oil permeates every aspect of our lives. It's not just at the gas pump," said Laura Lau, chief investment officer with Brompton Funds.
Lau says the indirect impact of energy prices is felt in just about everything we buy.
"It feeds through to all the goods that are shipped," Lau said. "For instance if you go to the grocery store, someone had to deliver all that stuff to the grocery store."
So, it's difficult to get a specific read on just how much higher energy costs are driving overall inflation numbers. But just about everyone agrees, it's hard to see how inflation as a whole begins to fall without a drop in oil prices while the economy is still so dependent on fossil fuels.
BMO's chief economist, Douglas Porter, says the first step isn't a drop, it's finding a way to slow the steady increase we've seen in global oil prices.
"What we really need are those oil and gas prices to stop rising so relentlessly first and foremost. That's what we need," said Porter.
But that's easier said than done.
The war in Ukraine is often cited as the key driver of increasing energy costs, and there's no doubt it's playing a role. But oil prices were already shooting up before the war began.
