My most recent post on the Fraser Institute Blog dealt with an international comparison of inflation and unemployment. Enjoy.
— December 3, 2021
With the inflation debate in Canada focusing on whether this inflation is transitory or not, we’ve seen little discussion about how our inflation compares with other advanced economies.
The International Monetary Fund released its update
of the World Economic Outlook Database in October and there are now
updated estimates for 2021 and beyond. While monthly consumer inflation
in Canada (according to Statistics Canada) is currently pushing 5 per
cent, our consumer inflation for 2021—as estimated by the International
Monetary Fund (IMF) using consumer prices—is expected to be closer to 4
per cent.
For the major 35 IMF advanced economies, consumer
inflation in 2021 is expected to average 2.8 per cent, putting Canada
well above the average. The rates are expected to range from highs of 7
per cent for Estonia and 5 per cent for the United States to lows of
just under 1 per cent for Switzerland and Japan. At 3.8 per cent,
Canada’s inflation rate for 2021 is expected to rank 6th highest of the
35 IMF advanced economies.
Of course, some might argue that a
little inflation might be just the lubricant needed to help
pandemic-stricken economies rebound given the traditional macroeconomic
relationship (provided by the Phillips Curve) between inflation and
unemployment, which posits an inverse relationship between the two
variables. That is, high inflation rates have been associated with low
unemployment rates whereas lower inflation rates have often been
accompanied by higher unemployment rates.
This would suggest that
across these countries, if Canada has a higher inflation rate, then it
should also have a markedly lower unemployment rate.
However, that
does not appear to be the case. Again, the IMF estimates for 2021
reveal an average unemployment rate for the 35 IMF advanced economies at
6.2 per cent with Canada again above the average at 7.7 per cent. The
highest rates are just over 15 per cent for Greece and Spain while the
lowest are expected in Japan and Singapore at just under 3 per cent.
Indeed, Canada is expected to have the 8th highest unemployment rate of
these advanced economies.
Higher unemployment and higher
inflation—once termed “stagflation”—is a truly miserable macroeconomic
outcome. Indeed, the sum of the inflation rate and the unemployment rate
has been dubbed the Misery Index and a quick calculation of this index
for these advanced economies puts Canada in the 6th highest spot. As the
chart below illustrates, the most “miserable” advanced economies in
2021 are expected to be Spain, Greece, Estonia, Latvia, Italy and Canada
with the combined sum of the inflation rate and the unemployment rate
ranging from 17.9 per cent to 11.5 per cent.
At the bottom in terms of misery are Taiwan, Singapore, Switzerland and Japan ranging from 5.4 per cent to 3.5 per cent.
For
Canadians, the adage that misery loves company will be cold comfort
given the higher costs of food, energy and rent that have marked the
last few months. While many might argue that our inflation is not as
severe as that of the U.S., with our unemployment rate remaining higher
than other countries (including the U.S. at 5.4 per cent), Canadians are
indeed left wondering if 2022 will be better or worse.
