Why are we still using old tools to fix new problems?

The Rate Hike Conundrum

In its bid to rein in the economy, the government persists with rate hikes in North America, leading many to wonder if we are stuck in a cycle of using old tools to fix new problems. In a surprising move, the Bank of Canada recently raised the rates by another 0.25%, with the prime interest rate reaching 6.70% on June 7, 2023, a sharp contrast from the 2.45% in 2020.

Inflation Drivers: Shelter, Food, and Energy

How has this steep rate increase addressed the main inflation drivers, namely shelter, food, and energy? For shelter, landlords face steep increases in insurance premiums and mortgage costs, leading to a surge in rents. Real estate developers grapple with rising labour costs, pricier construction materials, prolonged construction cycles, and heavy government taxes, making a drop in prices an untenable proposition.

The Surge in Food Costs

Food prices have remained high even after initial COVID-induced supply chain bottlenecks eased. This is attributable to factors like closed shipping routes and continued labour shortage in the industry. The cost of dining out and staying in has soared due to increased labour costs, translating into higher menu prices and shorter operating hours.

Your grocery bill has seen a sharp rise, too, with food costs increasing by 10.1% between January 2021 and January 2023. Select items like eggs and flour have shot up by 49% and 25%, respectively. Furthermore, the rise in grocery thefts, as indicated by the 26.5% increase in 2021 as per the National Retail Federation, also contributes to increased grocery costs. If a grocery store is losing 26.5% of its revenue due to theft, how do you think the business makes up for it? Prices have to increase to account for the lost revenues.

The Energy Crisis

As for energy, sustainable and economical alternatives are yet to become a reality, and sanctions have further complicated the issue, causing gas prices to remain high. A clear example of this is the staggering price of 204.9 per litre at a gas station in Vancouver, BC, Canada.

TIME FOR A NEW APPROACH

In conclusion, until the government can effectively address these diverse issues, ranging from risk-loving homeowners making precarious bets on their financial situation to managing input costs to various industries to navigating the global energy landscape, costs will continue to rise. Using the same levers in hopes of treating a new and unique economic problem is just that—hope. This calls for a paradigm shift from the current economic toolkit, demanding innovative solutions for these modern challenges.