Reflections on 2022

Governor Tiff Macklem discusses the important lessons from events in 2022 and what the Bank is doing to restore price stability for Canadians.

Watch Governor Macklem speak to the Business Council of British Columbia. Read the full speech.

What surprised us

This time last year, the Canadian economy was starting to recover from lockdowns. Inflation in Canada was 4.7%. Now inflation is close to 7%. So what happened?

One single thing didn’t cause inflation to climb to the highest it’s been in decades. Several unexpected factors combined and interacted with each other to drive prices upward:

  • Supply chain problems were more widespread and lasted longer than expected. This increased the prices of many goods imported into Canada.
  • Russia invaded Ukraine, causing the prices of oil and some agricultural products to rise around the world.
  • When the Canadian economy fully reopened, consumers wanted to catch up on what they had missed during two years of lockdowns. But businesses couldn’t keep pace with the higher demand—especially for services.

With the information we had a year ago, it was impossible to foresee all these developments. But it’s too convenient to write off the high inflation of 2022 as just bad luck. We need to reflect on what we learned.”

We learned a lot too

We have taken three lessons to heart:

  1. Increasing the supply of goods and services is harder to do than influencing demand. The steps we took to keep the economy running during the pandemic helped support demand, but we underestimated how long it would take to restore supply.
  2. The average imbalance between supply and demand doesn’t tell the whole story. During lockdowns, the increased demand for goods did more to push prices up than the decrease in demand for services did to pull them down.
  3. Supply chain problems had a bigger and faster effect on inflation than usual because so much pent-up demand was already in the Canadian economy.

We’re getting inflation back to 2%

Getting inflation back to the 2% target is our main goal. But the world looks a lot different now than it did during the past 30 years. Greater geopolitical tensions and a backlash in some areas against globalization will make it harder to bring inflation down and keep it there. But we have the tools to address uncertainty and adapt to surprises. And we are committed to restoring price stability so that Canadians can plan and spend for the future.

To get back to low, stable and predictable inflation we need to reduce demand and give supply a chance to catch up. It will take time for higher interest rates to bring inflation back to target, but the good news is that they are starting to work.

We know the adjustment is difficult. But it will be worth it. Our monetary policy is working, and once we all get through this adjustment, our economy can grow healthily with low inflation. That’s what lies ahead if we follow through.”

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

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