Countries, like Canada, which are major producers of such commodities, experienced a surge in income and wealth. But they also faced strong demand pressures and rising inflation. In Canada, the surge in inflation was especially dramatic, reaching 12 per cent in 1974. Once inflation had risen to those levels, it was very difficult to reverse. With each passing year, expectations of ongoing high inflation became increasingly entrenched.
High inflation exacts a heavy toll on an economy by making the future particularly uncertain.
Long-term financing becomes less available and more costly as interest rates go up because of inflation and the higher risk premiums that lenders demand as compensation for the increased uncertainty. Inflation diverts resources away from productive investments into speculative ventures in real estate and other financial assets. And in its interaction with the tax system, high inflation encourages businesses to increase debt. These are the very types of excesses that lead to, and indeed aggravate, the economic busts that inevitably follow. During the 1970s and 1980s, Canadians had first-hand experience with such complications.