Prime Minister Trudeau has been in office for six years, the first four atop a majority government and the last two leading a somewhat stable minority. As Trudeau heads into a summer election, he faces a Conservative opposition leader with Nova Scotia roots, an NDP leader from Toronto, and the leader of a regional party with all of their seats in Quebec. Despite not having an error-free mandate, he hopes to regain a majority. The year is 1974 and the PM in question is Pierre Trudeau.
Almost a half century later, Justin Trudeau is faced with a similar situation. (It’s not just a family affair for the Liberals, David Lewis was NDP Leader in 1974 and his grandson Avi Lewis is an NDP candidate in 2021.) While the 1974 election wasn’t fought amid a pandemic, there was an epidemic of inflation. For that reason, the election is perhaps best remembered for Pierre Trudeau’s dismissive “Zap! You’re frozen!” response to the Tory policy of wage and price controls.
As Canadians prepare to likely head to the polls in 2021, there are signs inflation may become a campaign issue in a way that it hasn’t been in more than a generation. Most economists, including the Bank of Canada’s Governor Tiff Macklem, expect the Canadian economy to rebound significantly as the remaining COVID-19 restrictions are lifted. Many of them also caution that the unprecedented economic circumstances we find ourselves in could create new collateral impacts such as inflation.
Since the start of 2021, inflation has tracked above the Bank of Canada’s 2% target and in some months even higher than its elevated forecasts. Canada’s inflation rate was 3.4% in April and 3.6% in May, the highest in a decade. While that may not seem high, and pales in comparison to the 12.7% inflation experienced in 1974 – the underlying causes driving Canada’s inflation rate to exceed forecasts and almost double the Bank of Canada’s targets are cause for concern.
Among the myriad factors driving inflation are global supply chain disruptions and shortages in strategic inputs such as semiconductors, rubber, and rare Earth minerals. Travel restrictions and quarantine rules continue to limit access to labour which has had a particular impact on agricultural production and agri-food processing increasing the cost of groceries. Rising oil prices are driving up fuel costs with the absence of pipelines restricting access to export markets for our energy sector.
Given the Bank of Canada now says inflation will remain above 3% in 2021, the upcoming election could feature more talk about interest rates than vaccination rates. That’s because the other lesson from 1974 is wage and price controls aren’t the solution. While Pierre Trudeau first derided them before he decided to adopt them, the real treatment for higher inflation was increased interest rates. If the same medicine is prescribed again later in 2021, there will be serious economic side-effects.
Canada’s low interest rates have allowed governments, businesses, households, and consumers to borrow heavily on the promise of ‘cheap’ money. If the Bank of Canada raises interest rates, any variable interest debt will become more expensive – leading to a round of belt tightening that could stifle Canada’s post-pandemic recovery. If inflation stays higher than the 2% target and our GDP growth slows to less than the anemic projected 2% we’d risk another ’70s throwback – stagflation.
There’s already reason to suspect that voters are concerned about uncertainty in the economy, and that it could be a key factor in deciding which party to support in the election. A recent poll by Nanos Research found that 28% of respondents said that the economy would be the most important policy issue likely to sway their vote – making it the highest ranked issue by far. The federal deficit came in third (after the environment), identified by over 16%, with COVID-19 falling to fifth place.
None of this has been lost on Trudeau’s opposition. Conservative Leader Erin O’Toole has called rising inflation an “economic crisis” particularly for the “working poor and first-time homebuyers.” His call to homebuyers was based on an almost 40% spike in the cost of housing and comparable surges in the cost of lumber, furniture, and essential household appliances. It’s a growing concern in most suburban ridings O’Toole needs to win to form government or hold Trudeau to a minority.
If Justin Trudeau hopes to repeat his father’s success in the 1974 election, when the Liberals were again able to secure a majority, he’d be wise to learn to not only the lessons of that campaign but also the years that followed. Voters who lived through high inflation during the ’70s – including Baby Boomers now in their 70s – won’t want to risk going through it all again on fixed retirement incomes. And they’re the age group who are the most likely to vote and decide races in key ridings.