Introduction to Inflation
The U.S. Federal Reserve and the Bank of Canada have recently lowered their benchmark interest rates. The Federal Reserve reduced its rate by 25 basis points on September 17 and again on October 29, bringing the current rate to a range of 3.5 to 3.75 percent. Similarly, the Bank of Canada mirrored the Federal Reserve’s rate cuts, resulting in a key rate of 2.25 percent. According to financial markets, it is expected that the central banks will maintain these rates over the next two to four months. However, historical trends suggest a high risk of inflation.
The Current Economic Situation
The U.S. unemployment rate appears to be rising, while the Canadian jobless rate remains elevated. This has provided justification for the central banks to lower interest rates in an effort to stimulate the economy. The U.S. has experienced minimal job growth in 2025, with an official unemployment rate of 4.4 percent in September, up from 4.3 percent in August. In Canada, the unemployment rate continues to hover around seven percent.
Inflation Trends
The Consumer Price Index (CPI) remains above the target of two percent set by both central banks. Inflation has not subsided to pre-COVID levels and continues to be a concern. In Canada, the CPI rose 2.2 percent year-over-year in October, down from 2.4 percent in September. Excluding food and energy, the core CPI increased to 2.7 percent in October, up from 2.4 percent in September. In the U.S., the CPI came in at three percent year-over-year in September, up from 2.9 percent in August.
Fiscal and Monetary Policy
The fiscal and monetary environment in Canada and the U.S. is a recipe for major inflation. The Bank of Canada’s benchmark rate was at 5.25 percent from July 2023 through May 2024 but has since decreased to 2.25 percent. The federal government has forecast a total deficit of $265.1 billion for the four-year period from 2025-26 to 2028-29, which is double the deficit projection under the previous government. In the U.S., the budget deficit continues to climb, and President Donald Trump has floated the idea of sending each American $2,000 from his so-called "tariff revenue," which would be highly inflationary.
Historical Patterns
The pattern from 2020 to 2025 mirrors the situation from 1971 to 1976, where inflation increased after the COVID recession and central banks raised interest rates. The interest rates peaked in 2023 and 2024 and have now declined to current levels. This suggests that we are heading into a major inflationary period given current fiscal and monetary policy. As economist Milton Friedman noted, "Central bankers always try to avoid their last big mistake. So every time there’s the threat of contractions in the economy, they’ll overstimulate the economy, by printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one."
Inflation and Interest Rates
The Federal Funds Effective Interest Rate and the U.S. CPI (annual rate) chart shows a clear pattern. The Fed Funds rate is the rate at which commercial banks lend reserve balances to each other overnight, set by the Federal Reserve. The pattern from 2026 to 2029 is expected to mirror the pattern from 1977 to 1980, with higher interest rates and higher inflation.
Conclusion
In conclusion, the current economic situation, with low interest rates and high government deficits, is a perfect storm for inflation. The historical patterns and trends suggest that we are heading into a major inflationary period. As Milton Friedman warned, inflation’s next high will be higher than the previous high. It is essential to be prepared for higher interest rates and higher inflation in the coming years. The cattle industry, in particular, should be aware of the potential impact of inflation on cattle prices, as seen in the late 1970s and early 1980s.
