INTEREST RATES & INFLATION

 

 

Inflation, Interest Rates, and the Blame Game

It’s not just greedy corporations. It’s not just Ottawa, either.

By Voice of Nanaimo Editorial Board

Ask ten people what causes inflation and you’ll get ten different villains:
“Greedy corporations.”
“Out-of-control government spending.”
“Central banks printing money.”

The real answer is less satisfying, but more useful:

Over time, inflation is what happens when total spending grows faster than what the economy can actually produce.

That’s the core. Everything else — interest rates, deficits, corporate profits — plugs into that basic relationship between demand (how much we’re trying to buy) and supply (how much the economy can deliver).

If we want to have an honest conversation about the economy instead of just shouting slogans, we need to start there.

What inflation really is

Inflation isn’t mysterious. It’s the same basket of groceries costing more this month than it did last year.

Inflation is demand outrunning supply for too long — not just a moral failure of one group.

Under the hood, it comes from two simple forces:

• Demand: households, businesses, and governments all spending money.
• Supply: workers, machines, farms, factories, and logistics actually producing and delivering goods and services.

When demand keeps outrunning supply, prices get bid up. When supply gets hit — a war, a pandemic, shipping snarls, drought — you can also get higher prices even if demand hasn’t exploded.

The inflation spike after COVID wasn’t one simple story. It was a pile-up:

• Supply chains breaking.
• Energy prices spiking.
• Massive COVID support programs.
• Rock-bottom interest rates.
• Pent-up demand when everything reopened.

That’s the messy reality. No single villain gets all the blame.

What interest rates really do (and don’t do)

Central banks like the Bank of Canada have one big lever: the policy interest rate. They raise it when inflation is too high; cut it when the economy is weak.

How does that actually affect “real life”?

When rates go up:

• Mortgages and loans get more expensive → fewer house purchases, less renovation, cooler construction.
• Business borrowing costs rise → some investments and hiring plans get shelved.
• The dollar often strengthens → exports take a hit, imports get a bit cheaper.
• Housing and stock markets cool → people feel less wealthy and pull back on spending.

All of that reduces demand. Not overnight. Over months and years. That’s the “long and variable lag” economists keep talking about.

Equally important is what rates don’t do:

• Higher rates do not produce more oil.
• They do not grow more wheat.
• They do not fix broken ports or empty warehouses.

When inflation is driven mainly by supply shocks — war, energy, crop failure, pandemic disruption — interest rates can still bring inflation down, but mostly by suppressing demand and slowing the economy, not by fixing the underlying problem.

So yes, rate hikes have a big impact on the real economy — but they’re a blunt instrument. They don’t deserve all the credit when things go right, or all the blame when they go wrong.

Is government spending “the” cause?

Government spending is a big chunk of total demand, and it absolutely can be inflationary.

If the economy is already running near full tilt and Ottawa (or any government) throws a massive new pile of money into the mix without raising taxes, that pushes demand higher. If the central bank doesn’t lean against that by raising rates, you’ve set the stage for demand-driven inflation.

That’s a fair criticism of the COVID era: unprecedented support programs layered on top of near-zero interest rates, at the same time supply chains were already strained.

But it’s not that simple.

In a deep downturn with lots of idle capacity, government spending can raise output more than prices. In that environment, stimulus can be stabilizing, not inflationary.

So the honest version isn’t “government spending = inflation.” It’s:

Government deficits become inflationary when they push demand beyond what the economy can produce, and when monetary policy lets that imbalance persist.

That’s a more complicated message than a campaign slogan, but it’s closer to the truth.

Is “corporate greed” the real story?

“Greedflation” has become a popular label. It’s emotionally satisfying: prices are up because companies are greedy.

But here’s the problem: corporations didn’t suddenly discover greed in 2021. Firms have always tried to maximize profit. If greed is constant, it can’t be the new explanation for why inflation suddenly spiked.

What did change was the environment:

• Sudden shortages.
• Wild swings in demand.
• Confused consumers, disrupted markets.

In that chaos, some firms — especially in concentrated sectors like energy, shipping, and some parts of food retail — clearly pushed prices higher than their own costs increased, widening profit margins. That amplified inflation and dragged it out longer than it might otherwise have lasted.

So “corporate greed” isn’t completely invented. But it isn’t sufficient, either.

The more accurate statement is:

Some businesses used a chaotic period to raise margins and pad profits, which made inflation worse in certain sectors — on top of the shocks coming from policy and supply chains.

That’s a nuance you won’t hear in most political talking points.

Five things worth remembering

If you cut through the noise, you get a few simple points the public almost never hears:

1. Inflation is demand outrunning supply for too long — not just a moral failure of one group.
2. Interest rates work by changing demand, not by magically increasing supply. They are powerful, but blunt.
3. Government deficits can fuel inflation, especially in a tight economy, but they don’t always and everywhere do so.
4. Corporate markups and market power can magnify inflation, but “greed” by itself is not a new cause.
5. There is no single villain. Inflation usually comes from a mix of policy choices, global shocks, and how households and firms react.

If Canadians understood these basics, we’d be harder to mislead by simple slogans — and a lot more demanding of serious answers from both politicians and corporate leaders.