Governor Tiff Macklem explains how inflation in Canada reflects more and more what’s happening with domestic demand and what the Bank is watching as it works to bring inflation back to the 2% target.

Watch the webcast of Governor Macklem’s speech to the Halifax Chamber of Commerce. Read the full speech.

Demand in Canada is outpacing supply

Higher prices for energy, food and tradable goods explain most of the surge in inflation we’re experiencing. Because many of these prices are set globally, Canadian monetary policy cannot influence them.

And global forces can also explain why inflation has eased slightly since its peak in June. For example:

  • some commodity prices are falling from their highs
  • supply bottlenecks are improving
  • shipping costs are declining

But domestic sources of inflation are becoming more important. In addition to higher prices in goods, we’re now also seeing higher demand for services driving up their prices as well.

Businesses are reporting widespread labour shortages. At the same time, wage growth has risen and continues to broaden. With demand running ahead of supply, businesses are passing on higher costs to consumers.

This is where increased interest rates come in. By raising interest rates, we are making it more expensive for households and businesses to borrow money. That slows their desire to spend, giving supply a chance to catch up.

We can’t control global developments. But we can use monetary policy to influence the balance between demand and supply in the Canadian economy and therefore ease domestic inflationary pressures over time.”

We need to increase the interest rate more

We’ve increased interest rates five times since March, and we’re already seeing results from our actions. Sectors that are more sensitive to interest rate increases, like housing, are already slowing. We’ll also be keeping a close eye on:

  • demand—to see how higher interest rates are working to cool the economy
  • supply—to see how quickly challenges are resolved
  • inflation—to see how it responds to higher interest rates

But inflation is still too high. It has been well above our target for more than a year, and expectations for future inflation have been rising. The longer this continues, the greater the risk that Canadians base their long-term plans on current inflation rates. This can become its own source of inflationary pressure.

And when inflation expectations become entrenched, we need even higher interest rates to restore price stability, which leads to a weaker economy.

Simply put, there is more to be done. We will need additional information before we consider moving to a more finely balanced decision-by-decision approach.”

We use a range of surveys to assess expectations of future inflation, including our Business Outlook Survey and Canadian Survey of Consumer Expectations.

Without price stability, nothing works well

High inflation creates uncertainty and unfairness for everybody. When inflation is high, both workers and businesses feel like they have less to show for their hard work. And it makes life especially difficult for those with low or fixed incomes.

We want an economy where the money Canadians earn keeps its value. And we know that when inflation is low and stable, at around 2%, people don’t have to think about it—they don’t factor it into their daily decisions.

With all Canadians facing a higher cost of living, we have taken forceful action to restore price stability. It will take time, but we are going to bring inflation back to the 2% target. Everyone should plan for that.

We know we are still a long way from the 2% target. We know it will take some time to get there. We also know there could be setbacks along the way, and we can’t afford to let high inflation become entrenched.”

Watch Governor Macklem answer questions from the media after his speech.

Read the full speech.

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Content Type(s): Press, Speeches and appearances, Speech summaries
Topic(s): Central bank research, Coronavirus disease (COVID-19), Domestic demand and components, Expectations, Inflation and prices, Inflation: costs and benefits, Interest rates, Labour markets, Monetary policy, Monetary policy and uncertainty, Price stability, Recent economic and financial developments, Service sector

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