Money Talks is a collection of daily columns from The Business Network, which airs weekday mornings on CBC Radio One at 5:45 a.m. ET (6:15 a.m. ET in N.L.).

By David Baskin, president of Baskin Financial Services in Toronto
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In the nine-year period starting in 1974, money lost more than half its value. Workers received cost of living raises of over 10 per cent per year and still found themselves falling behind. Pensioners and others on fixed incomes were devastated and many with previously comfortable lifestyles fell into poverty. To combat inflation, interest rates were forced higher and higher, with the prime rate peaking at 22 per cent.

In the period since 1983, our inflation rate has stayed below 3 per cent per year. An entire generation has grown up in an environment of stable prices and low interest rates. The Bank of Canada has been successful in keeping inflation close to its target rate of 2 per cent, and most people don't worry too much about it. There is good evidence that things might be about to change.

Prices for the key commodities we all must consume - oil and gas, wheat and steel - are rising fast and there is nothing that Canada can do about it. Rising demand from rapidly growing Asian economies requires suppliers of these commodities to expand their output, and many are having difficulty doing so.

As oil producers and refiners strain to put out more product, gasoline has risen to new highs at the pump and crude oil is trading at over $108 per barrel. Farmers are planting every available acre but prices for wheat, corn, soybeans and rice continue to set records as world wide grain stockpiles shrink. Copper has risen from $1 to $4 per pound in the past five years and similar percentage increases can be seen in zinc, tin, lead and iron ore.

The key mechanism central banks use to restrain inflation is higher interest rates. High rates make it more difficult to borrow money; businesses expand less, and consumers spend less. As demand falls, prices contract, or at least stop rising. Unfortunately, this tool cannot be used at the moment. With the U.S. economy in or close to recession, any increase in interest rates would cause an unacceptable constriction of the economy and more unemployment. Rather than tightening rates, central banks continue to loosen them. Rather than pushing back against demand, the monetary authorities are doing all they can to increase it.

We do not expect to see inflation rise to 12 per cent per year as it did in 1981. However, we would not be surprised to see a few years of price increases in the 5 per cent to 7 per cent range, more than twice as high as anything we have experienced in 25 years. In the late 1970s, cash was trash and commodities were king. The recent action on the stock market may be telling us that we are in for a repeat.

-- David Baskin

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