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Home Economic policy

Strategic price controls are the answer to today’s inflation – starting with gas prices.

Ontario and Western Canada should end price gouging at the pumps and implement gas price regulation models used in Atlantic Canada

by Ethan Phillips
March 14, 2022
in Economic policy
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Strategic price controls are the answer to today’s inflation – starting with gas prices.

Quebec and the Maritime provinces regulate the price at the pump. It is time all of Canada regulates gas prices.

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Canada’s inflation rate has been on the rise since January 2021, and it stands now at a 30-year high at 5.1 per cent. Not surprisingly, the Bank of Canada has been under increasing pressure from economists and financiers to raise the rate of interest — something the Bank finally did on March 2, increasing its key interest rate by 50 basis points.

But are further interest rate increases this year the right way to fight current inflation?

Before we address this question, a look at the current job situation is in order.

Canada’s labour market had an extraordinarily strong February.

The country added 337,000 jobs last month. The unemployment rate fell to 5.5 per cent from 6.5 per cent, taking it near a record low that was set months before the pandemic began.

A hiring binge was expected in February, but nowhere near as much as what took place. The median estimate from Bay Street analysts was an increase of roughly 125,000 positions.

Canada is enjoying one of the world’s top labour recoveries from COVID-19. By way of comparison, employment in Canada has increased 1.9 per cent since February, 2020, while in the U.S. it has fallen 1.4 per cent.

Why has Canada’s jobs growth been so impressive of late? Simple: since the start of the pandemic the federal government has harnessed both fiscal and monetary policy towards the goal of full employment. And it has worked.

Now let’s turn to the question of whether further interest rate increases this year beyond the 50 basis points already implemented is the best way to deal with Canada’s current inflation.

By definition, inflation represents the increase in the average price of the goods and services the average consumer purchases. But price increases are not the result of some abstract interaction between supply and demand, as generally stated; rather, prices are deliberately increased by producers to boost their profit rates. Indeed, producers raise prices either to offset higher costs of production, or to take advantage of favourable circumstances that allow them to exert their market pricing power. Therefore, to be successful, anti-inflation policies should be tailored to the specific conditions that prompt producers to raise prices.

Would an increase in interest rates reduce current inflation?

According to conventional theory, an increase in interest rates would reduce aggregate demand, particularly consumption demand. In turn, lower aggregate demand would translate into higher unemployment and economic recession — thus reducing workers’ bargaining power when negotiating wages. In other words, higher interest rates would reduce wage increases, that is, they would reduce labour costs of production.

Therefore, raising interest rates would arguably be the right policy to fight inflation when producers had increased prices to compensate for higher costs of production caused by wage increases. But workers’ wage demands are not the source of today’s inflation: average salaries have increased by only 2.8 per cent in 2021, and a similar increase is expected in 2022.

Then, if not higher wages, what is the source of today’s inflation?

In part, today’s inflation appears to be caused by increases in non-labour costs of production and supply-chain bottlenecks spurred by the pandemic. For instance, the price of oil increased by more than 70 per cent in 2021 and maritime shipping costs increased by 235 per cent in 2020. At the same time, the pandemic altered the world supply of semiconductors and other intermediate goods, thus causing a drop in the production of cars and trucks (as well as some other manufactured goods) and an increase in their prices.

 

Therefore, if inflation is due to producers’ response to imported higher non-labour costs of production, then an increase in interest rates will have little or no impact on inflation — that is, a reduction in domestic demand will not lower commodity prices or unravel supply-chain bottlenecks. Here, perhaps the Bank of Canada should pay attention to Nobel laureate Joseph Stiglitz’s advice: “A large across-the-board increase in interest rates is a cure worse than the disease. We should not attack a supply-side problem by lowering demand and increasing unemployment.”

But today’s inflation does not stem only from global issues insensitive to Canada’s monetary policy. The main source of today’s inflation appears to be producers’ pervasive exploitation of their market pricing power. As Isabella Weber notes in a recent article, it is not a coincidence that U.S. inflation occurs together with an explosion in profits. And it’s exactly the same in Canada where after-tax profits of non-financial corporations increased by a whopping 50 per cent in 2021. Indeed, it appears that “large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits,” concludes Weber. And she also suggests a solution to this problem: the imposition of strategic price controls — as it was successfully done during the Second World War — for as long as bottlenecks make it impossible for supply to meet demand.

Put bluntly, Canada must make a choice between tolerating the ongoing explosion of profits that drives up prices or tailored controls on carefully selected prices. Price controls would buy time to deal with bottlenecks that will continue as long as the pandemic and geo-political tensions prevail. Strategic price controls could also contribute to the monetary stability needed to mobilize public investments towards economic resilience, climate change mitigation and carbon-neutrality. The cost of waiting for inflation to go away is high.

We need a systematic consideration of strategic price controls as a tool instead of pretending there is no alternative higher interest rates.

Where should we start? How about gas prices. There is no question that prices at the gas pumps are a major contributor to today’s inflation. The federal government has the constitutional authority to regulate gasoline prices only in an emergency. However, provinces and territories can regulate gas prices, and Quebec and the Atlantic provinces have done so for many years.

On March 2, Ontario NDP MPP Gilles Bisson of Timmins, did just that by introducing a gas price regulation bill for Ontario. Bisson’s bill, Fairness in Petroleum Products Pricing Act, will give the Ontario Energy Board the mandate to protect the interest of consumers by giving it the power to set a weekly permissible gas price range. The aim of the bill is to prevent pricing practices that undermine the stability and competitiveness of retail gas price markets, especially retail markets in remote, rural and northern areas.

Gas price regulation would put a lid on gouging behaviour, stabilize prices for consumers and make the industry more transparent to all concerned. Big oil should not be able to jack up prices whenever a convenient excuse to do so comes along.

All provinces without gas price regulation regimes should look closely at gas price regulation in the eastern provinces and implement gas price regulation regimes tailored to their provinces.

Conclusion

Canadian unemployment is nearing record low levels because the federal government has harnessed both fiscal and monetary policy towards the goal of full employment.

However, despite a 50 basis point increase in rates on March 2, business and many corporate economists are pressing the Bank of Canada for more interest rate hikes this year.

This would be a mistake. Higher wages are not driving Canada’s current inflation rate and a further increase in the Bank of Canada interest rates this year has the potential to crash the housing market, the stock market, and the economy.

Strategic price controls, such as the gas price regulation regimes in Quebec and Atlantic Canada, are a much better approach to taming inflation.

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Ethan Phillips

Ethan Phillips

Ethan Phillips is the editor of Canada Fact Check and a practicing public policy and government relations consultant with 35 years experience researching, writing and consulting on Canadian and global public policy issues. He can be reached at Canadafactcheck@gmail.com.

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Canada Fact Check is an independent news platform dedicated to transparency, democratic reform, government accountability and corporate responsibility.

The editor of Canada Fact Check is Ethan Phillips, a practicing public policy and government relations consultant with 35 years experience researching, writing and consulting on Canadian and global public policy issues.

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