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How commodity prices affect our economy

Deputy Governor Toni Gravelle talks about the spike in commodity prices over the past two years, the impact on inflation and how the Bank of Canada is responding.

Watch the webcast of Deputy Governor Gravelle speaking to the Association des économistes québécois. Read the full speech.

Commodity shocks have pushed up prices

The Bank of Canada monitors the prices of various commodities like energy, lumber and agricultural products. This is one way we track inflation and how it’s affecting Canadians.

Prices for these commodities have doubled in the past two years, primarily because of:

  • the economic upheaval caused by the COVID-19 pandemic, alongside supply bottlenecks and production slowdowns
  • the Russian invasion of Ukraine

As a result, Canadians are facing much higher prices for everyday goods like gas and groceries. Inflation is at 6.7%—a three-decade high.

These are unusual times

Believe it or not, higher commodity prices can be a good-news story. Canada exports many commodities like oil and gas. When their prices are higher around the world, our exports command a higher price. This pumps more money back into the economy.

But as we all know, these aren’t normal times. Foreign investment in our energy sector is not as high as in the past because investors think demand for fossil fuels won’t be as strong in the long run. In addition, the Canadian dollar isn’t rising along with commodity prices like it normally might. If the Canadian dollar was stronger, it would cost less to import goods. This would help tamp down the high inflation we’re all experiencing.

With prices so high, some people are questioning whether we’re at risk of another period of stagflation like we saw in the 1970s. At that time rising inflation was accompanied by sluggish growth and high unemployment. This isn’t the case today.

  • With growth in gross domestic product averaging 6% in the last half of 2021, the economy is running hot.
  • Unemployment is at a record low of 5.2%.

And, unlike the turbulent times in the 1970s, the Bank now has a strong track record of keeping inflation low, stable and predictable. Since we adopted inflation targeting in 1991, inflation rates—and Canadians’ expectations of future inflation—have been well-anchored at our 2% target.

Inflation targeting has allowed households and businesses to spend less time and energy on trying to compensate—or find workarounds—for rising consumer and input prices.”

The Bank is adapting and adjusting

Since the onset of the pandemic, the Bank has been adapting to an environment of extreme uncertainty in Canada and around the world. It’s been difficult to predict how the economy would behave in the face of a once-in-a-generation health emergency, along with war in Eastern Europe. And some developments continue to surprise us, such as the strength and persistence of both inflation and global supply chain disruptions.

We are keeping a close eye on things like housing activity, supply chain challenges and consumer spending. We are continuously adjusting our modelling and our forecasts. And we are committed to bringing inflation back to target by adjusting our policy rate as forcefully as needed.

Simply put, with demand running ahead of the economy’s capacity, we need higher interest rates to cool domestic inflation. And as we’ve said before, the economy can handle it.”

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