Peter Hall: Why inflation is not really the problem

, the shock for those who opt to lock in at a higher rate, and the ultimate impact of rate resets when current mortgage contracts expire. Given this backdrop, at least 60 per cent to 70 per cent of our gross domestic product is highly sensitive to rate hikes.

It gets more somber. Soft landings are as tricky to achieve as they are desirable. Put more directly, monetary authorities have been known to overdo it. We can hardly blame them; monetary policy is a blunt tool at best, and perfect outcomes usually require a lot of luck. Moreover, cracking the psychology of inflation almost dictates monetary overreach, especially after a lengthy phase of well-behaved prices.

Take 1991. Amid monetary tightening, the new year brought the GST, which added seven per cent to the cost of most goods and services. Not surprisingly, the consumer price index jumped instantly, to 6.9 per cent. Fearing a re-kindling of higher price expectations, the central bank went to work. By the end of the year, year-over-year increases in the consumer price index were down to 3.8 per cent, and core price growth was just 2.9 per cent.

Success, right? Wrong. When 1992 arrived, the GST was fully embedded — that is, the year-to-year change disappeared. In monthly terms, prices were deflating. In January 1991, yearly price growth fell to 1.8 per cent, and by mid-year, all-items inflation was just 1.1 per cent. Suddenly, worry shifted to possible disinflation, or worse, deflation.

While a new national sales tax isn’t a worry this time, the dynamic is still the same. It doesn’t get much airplay, but on a monthly basis, core price growth has been slowing quickly, from the double-digit level in May to about four per cent in October. This is a remarkable shift, given that we are only in our ninth month of tightening. Allow time for the full effects to take hold, and we could be back to 1992.

'reaction to the remedy' - being that central banks purchased bonds and mortgage back securities and printed massive amounts of dollars for years, knowing this would eventually cause inflation that they now have to kill along with the economy. End the Fed.

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