Inflation drop as supply crunch eases is 'fairy tale economics'

A Canadian strategist said anyone who thinks inflation will be tamed by the easing of supply chain pressures is a believer in “fairy tale economics.”

A Canadian strategist said anyone who thinks inflation will be tamed by the easing of supply chain pressures is a believer in “fairy tale economics.” 

In an interview on Thursday, Royce Mendes, managing director and head of macro strategy at Desjardins, said “inflation is clearly no longer just a supply issue.”

“Anyone hoping the easing of supply chains will push inflation all the way back down to the two per cent target this year is, I think, engaged in fairy tale economics.”

Mendes pointed to factors such as the price of 80 per cent of items measured by the consumer price index basket rising faster than two per cent a year, the price of two-thirds of those items rising more than three per cent a year, home prices continuing to surge, and services inflation rising at the fastest pace in years.

He also noted that the most recent reading of the unemployment rate, were it not for Omicron, would have fallen below six per cent.

“So that all clearly states that the Bank of Canada not only needs to raise rates in March, but likely needs to do so again in April,” Mendes said. “It needs to reduce the bloated size of its balance sheet, and needs to continue raising rates into the second half of this year to contain the true inflationary pressures that are now blooming.”