What Caused Changes in the Canadian CPI over time?

We learnt in Economics that the Consumer Price Index (CPI) is the measure used for calculating inflation in an economy. Inflation is simply a persistent increase in a country's overall price level. We also learnt that the main causes of inflation are the cost-push, where there is a large increase in the price of inelastic goods, and so no substitutes are available; the demand-pull, when the demand for a good or service is greater than the supply; and finally an increase in the money supply, which decreases the purchasing power of the currency, hence leading to an increase in price. Today, I would like to discuss what were some of the major catalysts of change for the Canadian CPI in past years.

First of all, you should know that the Bank of Canada plays an important role in the Consumer Price Index. One of its goals are to maintain a low, stable and predictable inflation, in order to have a safe and secure currency, and to accomplish this, it strives to keep the inflation rate between 1% and 3%. Since the bank was initiated, the average inflation rate has been 3.13%. One advantage the bank has in achieving this goal is the ability to set the interest rate for money borrowed. Another is the power to ask Statistics Canada to periodically adjust the way the CPI is calculated.Since the 1980s, keeping inflation low has been the central bank's main priority.

 The Bank Of Canada played an important role in financing Canada's war effort during World War II by printing money and buying the government's debt. After the war, the bank's role was expanded to encourage economic growth in Canada. An Act of Parliament in September 1944 established the subsidiary Business Development Bank of Canada (BDC) to stimulate investment in Canadian businesses. Prime Minister John Diefenbaker established the central bank monetary policy, which was directed towards increasing the money supply to cause low interest rates, and have full employment. When inflation began to rise in the early 1960s, the governor of the Bank James Coyne ordered a reduction in the money supply. So here we see an example of how increased money supply in Canada led to an increase in prices, and therefore an increase in CPI.

Increased inflation 1960s

 The time between the end of the Second World War and the early 1970s was quite prosperous for Canada, as compared to Some of the European countries. We came out of the war with a fairly strong economy. Moreover, there were sizable and sustained gains in productivity through the 1950s and 1960s. These reflected the revolution in agriculture and the innovation and industrialization  and changes in technology that occurred during and after the war.
All this led to a rise in Canadian standards of living instead of the post-war depression that many had feared. Even though the agriculture industry saw the departure of a lot of its workers, the overall unemployment rate remained low. So you could see in the table, that the inflation rates were quite low through the 50s and the 60s prior to '64.

However, toward the end of the 20th century, inflation rates rose at an alarming rate, a phenomenon which was dubbed, "The Great Inflation", which lasted from about 1965 to 1984. Some reasons for the high inflation rates from the 60s to the early 80s, according to the economists include large and rising fiscal deficits (due to widespread acceptance of the Keynesian theory, and the idea of coordinating monetary and fiscal policy), a slowdown in productivity growth; and a decline in the prices of primary commodities.

On the other hand, a recession will lead to the decrease in the inflation rate, because people will be spending less and saving more.There will be more supply and less demand, and as a result, prices will drop. This is a reversal of the demand-pull. This situation creates a deflation instead of an inflation. For instance, one can see in the CPI chart that during the Great Depression from 1929 to 1939, the inflation rates were very low. There was a similar occurrence during the 2009 recession, although on a much smaller scale.
Great Depression chart 

To conclude: inflation is a given; no successful economy can be completely without it.It happens on a regular basis, and it often differs from year to year.While it has its negative aspects, mainly the increased prices hence making it harder to come by needs and wants, and decreased purchasing power, it has some positives in that it helps to boost the economy, for example, one that is stuck in a recession. All in all, I believe that inflation needn't be a bad thing necessarily; it only needs to be carefully managed. 
Thank you.

https://www.youtube.com/watch?v=3vwPgX24g28

Inflation

Inflation

Last week in class , we went over a activity that involved us bidding on several different products that were being showcased by the lovely Mrs. Teetaert. As the price of the items increased, less people were bidding on them and towards the end it became a competition of who wanted the item end. Afterwards we learned that the activity showed us how inflation really works.

What is Inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money, and a loss of real value in the medium of exchange and unit of account within the economy. To simply put it;  inflation is an upward movement in the average level of prices. It is also believed by economists that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. When we look back at our game in the second round, we found out what the items were and figured out the value. When we were introduced to more disposable income in the second round, we watched most students bid high amounts of money simply because they had the cash to do so.

Understanding Inflation

The following is a video defining deflation and relating the term with purchasing power.

Relationship between Inflation and Money

Inflation and its increase of prices will always be linked to money. Inflation is a high level of money pursuing a low level of goods/services. An example of how this works , picture a world that has just two commodities: Apples picked from apple trees, and paper money printed by the government. In a year where there is a drought and apples are limited, we'd expect to see the price of apples rise, as there will be quite a few dollars chasing very few oranges. On the other hand, if there was a high level of apples one year, we'd expect to see the price of apple fall, as apple sellers will need to reduce their prices in order to clear their inventory. These scenarios are inflation and deflation, respectively, though in the real world inflation and deflation are changes in the average price of all goods and services, not just one.

Relationship between Inflation and Money supply

Inflation as well as deflation can be caused by altering the level of money that is in the system. If the government prints large amounts of money, dollars become abundant relative to apples, in the last example. Therefore inflation is caused by the amount of money rising relative to the amount of goods and services. Deflation is caused by amount of money falling relative to goods and services.

In the Real World

In an article posted in January reading "Inflation rate rises to 1.5 in January" by the Canadian press talked about how the inflation rate in Canada raised from the previous month from Decembers 1.2 per cent. The cause of the increase was due to increased shelter, transportation, and food costs. Statistics Canada said seven of the eight major components of the consumer price index were up from a year ago. Higher electricity and insurance costs pushed up shelter costs. This shows how there was an overall demand increase in the growing economy. Demand for goods exceeds the capacity for manufactures to build them and prices rose, which led to inflation rising. While high levels of inflation seems dangerous, deflation in my opinion is even more dangerous. A high level of deflation will cause people to get laid off, spend less, prices become lower, which in my opinion will cause people to wait longer to see if prices can lower further, but consumers have less money to spend so they still buy less. Although inflation raises prices over time, I do believe that some inflation is a good thing.