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Prime Minister Justin Trudeau rises during question period in the House of Commons on Parliament Hill in Ottawa on Nov. 24, 2021.Sean Kilpatrick/The Canadian Press

As inflation rises to new heights, Canadians would seem to have their choice of two responses: Liberal complacency or Conservative hysteria.

Just how clueless and/or indifferent the Liberals are about inflation was revealed in the course of that 32-minute stroll through the desert of their imagination that was the Speech from the Throne. Even by the standards of previous Throne speeches, this was a tour de farce: a speech about “Building a Resilient Economy” that barely mentioned the economy.

Even so, one assumed they would have to say something about inflation: with consumer prices growing at the fastest pace in two decades, and polls showing it topping the list of public concerns. At length, it came: “Inflation is a challenge,” the Governor-General intoned, “that countries around the world are facing.” A little defensive, but okay. “We must keep tackling the rising cost of living,” she went on, as if to suggest the tackling had been under way for some time. “The government’s plan” – yes, yes? – “includes two major priorities: housing and child care.”

Wait … that’s it? The government’s plan for inflation, a generalized and continuing rise in prices, is to … cut the price of two items. Or rather, to subsidize the demand for them, with billions of borrowed dollars, on top of the hundreds of billions it is already borrowing. When a party says it has an inflation plan, it is usually taken to mean it has a plan to reduce inflation.

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Meanwhile, the Conservatives have been playing their own silly games with the issue. The party’s current leader, Erin O’Toole, insists we are in a “cost of living crisis,” on the strength of a few months of over-target price increases, while its former future leader, Pierre Poilievre, blames it on a conspiracy between the government and the Bank of Canada.

There is more that is right on the Conservative side of the argument, but also more that is wrong. They are right, certainly, to make an issue of inflation, and not only because it is politically advantageous. As Keynes himself famously observed, there is no surer way to undermine an economy than to “debauch the currency.”

They are on less sure ground in blaming the government for it – or the Bank, for that matter. The argument that current price increases are more a problem of supply than demand, an outgrowth of pandemic-induced “kinks” in global production processes, has much evidence to support it, not least in the concurrent surge in prices around the world.

Certainly it is true that, in the long run, inflation is “always and everywhere a monetary phenomenon,” a line from Keynes’s latter-day nemesis, Milton Friedman, that Conservatives are fond of quoting. But to say that inflation is a “monetary phenomenon” is not the same as saying that more money automatically equals higher inflation. Especially in the short run.

The impact of monetary policy on inflation lies at the intersection of a number of variables: among them is the supply of money, yes, but also the demand. A given increase in money supply can produce very different results in some circumstances than in others – for example, in the midst of a once-a-century economic contraction.

It is no doubt true that the government ran larger deficits than were necessary to support Canadians through the pandemic and its associated lockdowns: that per capita incomes were higher after the recession than before suggests a degree of overkill. But the bulk of the borrowing was unavoidable – and so far as the government was obliged to issue such extraordinary amounts of debt, in response to such a temporary emergency, it made sense for the Bank to finance it, as a temporary expedient. Otherwise interest rates would have soared.

The issue is what happens next. Whether or not the deficit spending and monetary creation of the past 18 months are to blame for inflation’s current rise, what is true is that keeping inflation – and as important, inflation expectations – in check depends upon their discontinuance. Conservatives are right to raise the alarm at the Liberals’ apparent intention to run large deficits indefinitely.

But whether these prove inflationary depends on what the Bank does. The case for panic asks us believe, to borrow the economist Tyler Cowen’s formulation, that the Bank of Canada either does not want to control inflation or is not able to. I see no reason to suppose either is true. The Bank has already ceased further net purchases of government bonds, and has signalled its intent to let interest rates rise.

Between Liberal complacency and Conservative hysteria, then, there is still a third option: prudent caution.

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