This week, Karyn Silenzi talks about inflation - and what's the big deal about it. Canada, unlike some other countries, has never experienced hyperinflation, which is an extreme form of inflation typically defined as price increases exceeding 50% per month. However, the country has faced periods of high inflation, particularly in the 1970s and early 1980s, which had significant impacts on the economy, shaped public policy, and altered the financial behavior of its citizens. To understand how inflation affected Canada, it’s essential to explore the economic environment of the time, how inflation impacted citizens’ day-to-day lives, and the policy responses that eventually brought inflation under control.
The 1970s: The Beginning of High Inflation
Canada’s bout with high inflation started in the early 1970s, a decade characterized by global economic turbulence. Inflationary pressures in Canada were fueled by both domestic and international factors. The global economy was experiencing rapid changes, with the collapse of the Bretton Woods system, which had fixed exchange rates for major currencies, and rising energy prices following the 1973 oil crisis. The price of oil quadrupled when the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo, leading to a sharp increase in energy costs worldwide, including in Canada.
At home, wage increases and government spending also played a role. The federal government had embarked on expansive social programs and infrastructure projects, which contributed to growing public debt. Additionally, rising wages, driven in part by strong labor unions, pushed production costs higher, which in turn was passed on to consumers in the form of higher prices.
Between 1971 and 1975, inflation in Canada steadily increased, and by the late 1970s, it reached alarming levels. By 1979, inflation was hovering around 9%, and it continued to rise into the early 1980s. This period marked one of the most severe inflationary episodes in Canada’s modern economic history.
The Early 1980s: Inflation Peaks
The situation worsened in the early 1980s, when inflation peaked at 12.9% in 1981. Several factors contributed to this surge. The energy crisis of the 1970s had ongoing ripple effects, with high oil prices continuing to drive up costs for goods and services. Additionally, central banks in many advanced economies, including Canada, had been slow to act on inflation, in part because of concerns that raising interest rates too quickly would hurt employment and economic growth.
For Canadian citizens, the impact of this high inflation was profound. Prices for everyday necessities—such as food, gas, and housing—rose rapidly, eroding the purchasing power of wages. For example, the cost of groceries, transportation, and home heating increased significantly, putting financial pressure on households. Workers demanded higher wages to keep pace with the rising cost of living, which created a wage-price spiral: higher wages led to higher production costs, which further drove up prices.
Homeowners and potential homebuyers were hit particularly hard by inflation. Mortgage interest rates skyrocketed as the Bank of Canada attempted to curb inflation by tightening monetary policy. By 1981, the prime interest rate in Canada had reached an all-time high of 21%, making borrowing extremely expensive. For homeowners with variable-rate mortgages, monthly payments soared, while those looking to purchase homes faced prohibitive borrowing costs. This led to a slowdown in the housing market and financial strain for many families.
Inflation also impacted savings and investments. In an inflationary environment, money loses value over time, meaning that savings held in cash or low-interest accounts did not keep pace with rising prices. This eroded the real value of Canadians' savings, making it difficult for many to plan for retirement or save for significant purchases. Investors also struggled, as stock markets were volatile, and fixed-income investments like bonds offered returns that were often lower than the inflation rate, leading to negative real returns.
The Policy Response: Taming Inflation
The high inflation of the 1970s and early 1980s forced the Canadian government and the Bank of Canada to take drastic measures to stabilize the economy. The Bank of Canada, under the leadership of Governor Gerald Bouey, adopted a much more aggressive stance against inflation by the early 1980s. The central bank raised interest rates sharply to curb the money supply and slow down economic activity. This policy, known as monetary tightening, aimed to reduce inflation by making borrowing more expensive and encouraging saving over spending.
The tight monetary policy eventually succeeded in bringing inflation down, but it came at a significant cost. The Canadian economy entered a deep recession in the early 1980s, with unemployment reaching 12%. Many businesses closed or scaled back operations, and household bankruptcies rose as people struggled to meet their debt obligations. While inflation eventually receded—falling to around 4% by the mid-1980s—the economic pain caused by high interest rates and the subsequent recession was severe.
In addition to monetary tightening, the federal government introduced wage and price controls in the mid-1970s, as part of Prime Minister Pierre Trudeau’s Anti-Inflation Program. This program sought to cap wage and price increases for a limited period to prevent the wage-price spiral from worsening. While these measures had some short-term success, they were not sufficient to tackle the root causes of inflation, and inflation remained persistently high until the central bank’s more decisive intervention.
The Long-Term Impacts on Canadian Policy and Society
The experience of high inflation in the 1970s and early 1980s had lasting effects on Canadian economic policy and the behavior of both policymakers and consumers. The most significant policy shift came from the Bank of Canada’s adoption of inflation targeting in the early 1990s. Under this framework, the Bank of Canada set a specific inflation target—initially 3%, and later revised to 2%—as the goal for monetary policy. By anchoring inflation expectations, the central bank aimed to provide stability and predictability for consumers and businesses.
Inflation targeting proved to be highly successful in keeping inflation in check, and since the 1990s, Canada has enjoyed relatively low and stable inflation rates. This has contributed to stronger economic growth, greater consumer confidence, and a more stable financial environment.
For citizens, the legacy of high inflation changed attitudes toward debt, savings, and investment. The high interest rates of the early 1980s made many Canadians wary of borrowing, particularly for large purchases like homes. As inflation subsided and interest rates fell, Canadians slowly returned to the housing market, but the memory of double-digit mortgage rates lingered. Additionally, many households became more focused on ensuring that their savings and investments were better protected from inflation, leading to greater interest in real estate, equities, and inflation-protected securities.
While Canada never experienced hyperinflation, the high inflation of the 1970s and early 1980s left a lasting mark on the country’s economy and its citizens. The sharp rise in prices, combined with skyrocketing interest rates, created financial hardship for many Canadians and prompted significant policy changes.
The eventual adoption of inflation targeting by the Bank of Canada helped bring inflation under control, stabilizing the economy and shaping the country’s modern approach to monetary policy. Understanding this period provides valuable lessons about the importance of maintaining price stability and the delicate balance between controlling inflation and supporting economic growth.
