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September 8, 2021

Now would be a good time for federal parties and Bank of Canada to remind Canadians of merits of low inflation

Statistics Canada’s latest gross domestic product release contained at least two surprises. The first was that real GDP fell at an annualized rate of one per cent in the second quarter. That made headlines. With all the stimulus and rising optimism about recovery from the COVID recession, why the setback?

But a second surprise was that nominal spending — measured in the dollars that actually changed hands, before adjustment for price changes — rose at an eight per cent annualized rate. That raised eyebrows. The difference between a one-per cent real fall and an eight-per cent nominal rise is nine per cent higher prices. Real activity slipped a little. The value of our money slipped a lot.

We already knew that consumer prices were up 3.7 per cent over the year to July — way above the Bank of Canada’s target of two per cent. The Bank has been keeping short-term interest rates close to zero and buying government bonds to hold down long-term interest rates. Does the GDP report show that fiscal and monetary policy are combining to push inflation higher?