The Wealth Destroying Effects of Inflation

Maxime Bernier wrote a guest column for the Financial Post on Tuesday which comments on the interference of the central bank in the Canadian economy. He suggests that the Bank of Canada’s move to increase interest rates is more about controlling money supply rather than leaving the market free to run its natural course. In a true free market, of a more capitalist society, the interest rate would not be changed by monetary policy, rather it would “be determined by the demand for credit and supply of savings.”

Bernier also brings to our attention that the central banks are continually increasing the amount of money in circulation which, in turn, increases prices for consumers. The targeted 2% per year inflation rate ends up costing citizens a 45% inflation rate over the past 20 years. Although some people protest against increasing taxes we don’t see many arguing with increasing inflation, even though it acts just like a tax and takes more money from those who can’t afford to lose it while “eat[ing] away at our revenues and savings.”

Unfortunately inflation has been known to cause much of the fluctuations in our economy. If we saw deflation and prices dropped people would still continue to spend money, stimulate the economy and increase purchasing power, which means a higher standard of living for all. Bernier suggests that if the central bank stopped manipulating the flow of money, we would still be able to move forwards as a society. Technology changes, the population grows and people generally find ways to become more efficient. This would lead to an increase in the number of goods and services available but alternatively, people would continue to have the same amount of money with which to purchase them. An increase in purchasing power would allow consumers purchase more items with the same amount of money. At the same time, costs would decrease for businesses so profitability wouldn’t become an issue.

Ultimately, citizens should consider how the Bank of Canada’s target 2% annual inflation rate will influence their purchasing power, standard of living, and also their lives.