Bank of Canada governor Tiff Macklem called evidence that inflation decelerated in July a “relief,” but stopped well short of declaring victory in his year-long struggle with elevated cost pressures.
Macklem was responding to the latest release of Statistics Canada’s consumer price index, which increased 7.6 per cent in July from a year earlier, compared with 8.1 per cent the previous month, representing the first year-over-year decrease since June 2021.
However, the slowdown was almost entirely the result of lower gasoline prices, which have an outsized influence on the headline number. There was evidence in the report that inflation actually broadened across the economy, as more than 60 per cent of the items in Statistics Canada’s price basket posted annual increases of more than three per cent, according to Royal Bank of Canada economist Claire Fan.
Even more alarming were the Bank of Canada’s three “core” measures of inflation, which attempt to smooth the influence of volatile prices such as oil. The average of the three increased to an annualized 5.3 per cent, a record high that was well outside the central bank’s comfort zone.
“Tuesday’s inflation number offers a bit of relief, but unfortunately, it will take some time before inflation is back to normal,” Macklem wrote in an opinion piece for the National Post on Aug. 16. “We know our job is not done yet — it won’t be done until inflation gets back to the two-per-cent target.”
Macklem pointed to the central bank’s aggressive path of rate hikes since March; a period during which policymakers lifted the benchmark rate to 2.5 per cent from 0.25 per cent in four increases, including a dramatic one-percentage-point hike in July.
These moves are a hard pivot from the bank’s hesitation to increase the policy rate in January, hesitancy that caught Bay Street economists off-guard at the time. Macklem acknowledged back in April that the central bank had misjudged inflation pressures and pledged to act more forcefully in bringing cost pressures to heel.
The pace of rate hikes is jarring to an economy that had gotten used to both low inflation and low interest rates. The challenging dynamic isn’t lost on Macklem.
“We recognize that for many Canadians higher interest rates will add to the difficulties they are already facing with high inflation,” Macklem wrote. “But it’s by raising borrowing costs in the short term that we will bring inflation down for the long term,” he continued. “High inflation hurts us all. It eats away at our purchasing power and makes it difficult to plan our spending and saving decisions. It feels unfair and that erodes confidence in our economy.”
Both central bankers and economists say the inflation surge over the past year won’t be resolved overnight, particularly with continuing global supply chain snarls, unpredictable COVID-19 lockdowns in China, and the threat of a wage-price spiral as Canadians look for higher salaries to combat rising cost pressures, which could keep inflation elevated for a long time.
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With the next policy rate decision coming down on Sept. 7, Bay Street economists are generally torn between the possibility of a 50- or 75-basis-point hike. What they do agree on is that the Bank of Canada has more to do to balance supply and demand pressures in the economy by curbing demand.
In his own words, Macklem agreed that this is an ongoing priority for the bank and reiterated his pledge to go further in bringing inflation back to something closer to two per cent.
“The best way to protect people from high inflation is to eliminate it,” Macklem wrote. “That’s our job, and we are determined to do it.”
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