Factors driving hot Canadian inflation still seem temporary, central bank chief says

October 7, 2021

By Julie Gordon

OTTAWA (Reuters) -The factors influencing Canada’s red-hot inflation are proving more persistent than expected, but there are “good reasons to believe” they remain temporary, Bank of Canada Governor Tiff Macklem said on Thursday.

Macklem, answering questions after a speech to a foreign policy think-tank, said Canada’s central bank continues to expect inflation to remain above its 1-3% control range in 2021, primarily due to base-year effects and supply chain disruptions.

“There’s a bit more persistence than we previously thought. But when you look at it, I think there are good reasons to believe that they are temporary,” he said, when speaking about the factors driving inflation.

Canada’s annual inflation rate accelerated to 4.1% in August, an 18-year-high. That has led to public outcry over rising prices and prompted worries that those hikes could become persistent.

“Our job as a central bank is to make sure that one-off increase in prices doesn’t become ongoing inflation… What we’re really looking for is to see any signs of spreading,” Macklem told reporters.

He said while short-term measures of expected inflation had moved up, medium- to longer-term measures of expected inflation had not.

Macklem also said the central bank was watching wage growth carefully. It is not seeing evidence of wages becoming an independent source of inflation, he added.

“I do want to assure Canadians that they can be confident that we will control inflation,” he said.

It is taking longer than expected to work through “frictions” in the labor market, as companies need time to find the right workers, and workers have to find the right jobs.

“We’ve never reopened an economy before. And I think what we’re seeing is reopening an economy is a lot more complicated than closing one,” he said.

Economists said the remarks were consistent with guidance that the Bank of Canada will keep rates on hold until the second half of 2022.

On the central bank’s monetary policy framework, Macklem said Canada needs something “that is robust to a broad range of circumstances.”

The bank is reviewing its inflation-targeting framework, in place since 1991. The current agreement with Ottawa expires at the end of this year.

The U.S. Federal Reserve switched to a loose form of average inflation targeting last year.

(Additional reporting by Steve Scherer and David Ljunggren in OttawaEditing by Frances Kerry, Paul Simao and Andrea Ricci)

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