In recent weeks, energy prices have exploded thanks to several factors. The Russian invasion of Ukraine, the anti-pipeline, anti-development ideology of Trudeau’s federal government. And the massive amount of money-printing that occurred during the pandemic. Supply chain disruptions and too many dollars chasing too few goods have led to this problem.
So far cannabis has gone unscathed. Or so it seems.
The legal American States report cannabis prices either the same or cheaper than this time last year. The same is true in Canada as well, where demand threatens to outpace supply. In the early days after legalization, this was the norm. Then, as supply caught up to meet demand, prices fell to market equilibrium. This took a few years, even longer in places with strict government barriers. But overall, the cannabis market has seemed to stabilize.
Another factor that has likely helped has been the legacy market. It’s no secret every level of government in Canada is trying to eradicate the underground market. If the price of legal cannabis is always higher than “street dealers,” this won’t happen. Thus, other factors may be overwhelming inflationary signals.
What would cause cannabis prices to rise?
Other than legal novelty, there is nothing particularly special about cannabis in the economy. Like food, you can grow your own. Unlike other goods, cannabis cannot be a victim of “shrinkflation.” Where the price remains the same but the good in question is smaller (think cereal or chips or portion sizes at restaurants). The supply chain backlog affected cannabis. With parts for vape pens and torches stuck on cargo ships off the Pacific coast.
It’s more likely the higher costs of the cannabis industry are eating up margins. Instead of passing the costs onto consumers, who have easy access to the legacy market, retail owners take the hit themselves. Or, in places with government monopolies like Quebec, the cost is absorbed by taxpayers. The question is, how long will business owners and bureaucrats put up with these costs?
In the meantime, cannabis producers can cut costs by trimming the fat. Cancelling expansion plans will help cushion the blow that comes from a prolonged state of artificially low-interest rates. And by focusing on their best-selling products rather than variety and research and development, producers and retailers can limit their exposure to uncertainty.
Because inflation is more than just higher prices.
Consider how complex the cannabis industry is, and this is one of many. There are multistep processes that occur over time and use different capital goods and labour inputs at various points in time. From growing to harvesting to processing to packaging. The success of a cannabis business means coordinating these resources at the right place at the right time.
Interest rates are the price of time.
That is why prices and interest rates are important. A market interest rate coordinates the countless preferences of consumers with the plans of entrepreneurs. When the central bank alters interest rates (by lowering them through expansion of the money supply), it clouds this coordination between consumers and entrepreneurs.
At first, there is more money in the economy, so there’s a boom period where producers launch into projects and consumers increase their consumption. All based on an expectation of a future state of supply and demand. But this is a false expectation is because interest rates didn’t fall naturally. There are no new savings in the economy. There isn’t extra capital lying about. Labour is tied into specific jobs and can’t easily move from one sector to the next.
Essentially, by mandating lower interest rates when the market isn’t ready for it, the central bank guarantees a future crash. They cause a recession. This becomes obvious over time as rising prices and product shortages and supply chain issues become the norm. Like right now. Except, in the real world, the central bank never takes responsibility. And politicians who believe a central bank should remain “independent” never criticize them. Instead, foreign actors or “greedy” capitalists take the blame. In reality, the problem rests at the feet of the central bank. An unelected, unaccountable, secretive institution that has no place in a free society.