Inflation went through a puzzling path after the financial crisis of 2008-09 and the reasons why warrant a closer look, according to a C.D. Howe Institute report. In “Inflation after the Crisis: What’s the Story?” authors Jeremy Kronick and Farah Omran explore a link between the breadth of economic growth and inflation performance over the period following the financial crisis.
The authors find missing inflation occurred when growth was higher but concentrated in a smaller set of industries and wealthier income quintiles.
One possible explanation for the link between broad-based growth and inflation is different spending by different income quintiles. It is possible that the more widespread, or less concentrated, growth is, the more resources are spread across different income quintiles, rather than concentrated at the top. This matters since lower income households tend to spend a higher percentage of their income, driving up inflation. The authors find, that the sectors that contracted the most, and dampened inflation during the missing inflation period, were those where lower-income households typically spent relatively more.
“The robustness of this link suggests that the industry makeup of economic growth matters for inflation behaviour, and as a result, matters for monetary policy,” says Omran. “Going forward, the Bank of Canada could use this tool to help assess the path of inflation.”