Inflation in Canada: a remarkable fall
Despite the significant fall in the inflation rate, which is now within the government’s target range, the Bank of Canada has shown no signs of flexibility. Statistics Canada recently revealed that inflation had fallen remarkably to 2.8% in June, down significantly from 8.1% last summer.
Good news, but the Bank of Canada remains vigilant
This rate, which falls within the range of 1-3% set by the Bank of Canada, was welcomed by Chrystia Freeland, federal Minister of Finance, who was delighted to see the lowest inflation rate among G7 countries. Nevertheless, the Bank of Canada remains determined to fight inflation. It is likely to continue raising its key rate rather than lowering it in the short term.
Why is the Bank of Canada insisting on raising its key rate?
Earlier this month, the bank raised its key rate to 5%, an increase of 0.25 percentage points, at a time when data showed an annual inflation rate of 3.4% in May. Bank of Canada Governor Tiff Macklem said at the time that the central bank was prepared to raise the rate further if new data suggested that it needed to do more.
The impact of monetary policy on inflation
Faced with this situation, the Bank of Canada’s strategy may seem unusual: why persist in raising the key rate when inflation has fallen significantly?
Understanding Bank of Canada policy
Economists are familiar with monetary policy lags. Indeed, it can take one to two years for an increase in the policy rate to have a fully perceptible effect on the economy. Despite this, the Bank of Canada remains adamant in its policy: it is aiming for an inflation rate of 2%, which is the mid-point of its 1-3% target range. No more, no less.
Future inflation: Bank of Canada projections
New projections from the Bank of Canada suggest that the gains made in the fight against inflation over the past year will slow. It predicts that inflation will remain around 3% over the next year, gradually returning to the 2% target by mid-2025.
Future challenges in inflation control
Reaching this target could take six months longer than originally planned. Private sector economists expect the return to 2% inflation to be a difficult challenge. The process may even suffer a few setbacks.
Core inflation and prices of everyday items
Some indicators continue to give cause for concern, such as core inflation, which provides a better indication of price pressures. Lower gasoline prices have made a significant contribution to slowing inflation, but the price of other everyday items continues to rise.
The Bank of Canada and inflation and recession
Ultimately, according to Benjamin Tal, CIBC’s Deputy Chief Economist, the Bank of Canada is an institution more concerned with high inflation than with the risk of recession. Mr. Tal believes that this tendency led the Bank of Canada to take excessive measures in June. However, he stresses that the Bank will have to back down at some point, especially in the face of growing signs of an economic slowdown.
