Opinion: Will anyone still believe the Bank of Canada?


Bank of Canada Governor Tiff Macklem attends a news conference in Ottawa on June 9.PATRICK DOYLE/The Canadian Press

Tiff Macklem spent much of the second half of 2021 trying to convince Canadians that rising inflation numbers weren’t all they were supposed to be. He now finds himself making a similar argument in the opposite direction – as a dampener on enthusiasm for lower inflation.

The Governor of the Bank of Canada got down to business raining down on the parade in the hours following Tuesday’s Consumer Price Index (CPI) report, which showed the rate of July inflation had fallen to 7.6% from 8.1% in June – the first drop in 13 months. His message: “Inflation in Canada has come down a bit, but it’s still way too high.

Mr. Macklem pointed out that while some of the main drivers of extreme consumer price gains have reversed – particularly gasoline, agricultural products and global shipping costs – many of the main underlying inflationary pressures are still in place. Supply chain disruptions persist. The war in Ukraine continues. More importantly, Canadian domestic demand still exceeds supply.

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The implication is that while lower commodity prices seem likely to continue to dampen the headline inflation rate year-on-year, the central bank remains committed to raising interest rates to calm demand. It is not relief from inflation that the bank seeks. Not yet.

“Tuesday’s inflation figure offers some relief, but unfortunately it will take some time before inflation returns to normal. We know our job isn’t done yet – it won’t be until inflation returns to the 2% target,” Mr. Macklem concluded.

The very nature of his remarks – he wrote them in an opinion column published by the National Post (in English) and La Presse (in French) – is unusual in itself. Newspaper editorials are a rarely used communication tool for the Bank of Canada. The Governor generally does not spontaneously comment publicly on key economic indicators on the day they are released; the bank’s style is to play its analytical cards close to its chest until it has a more formal platform to share its thoughts.

The comment published by Mr. Macklem demonstrates the importance he places on the bank to stay ahead of public opinion on inflation. He was not prepared to sit on his message and let the misunderstandings fester until the next Bank of Canada rate announcement (certainly another hike) in three weeks.

But this message sounds oddly familiar, albeit in a rather different context. I’m talking about the “transitional” inflation talk from central bankers last year – which has become a major policy and communications flaw for Mr. Macklem and his colleagues.

As the rate of inflation accelerated towards the middle of last year, the Bank of Canada repeatedly argued that the increases were largely temporary in nature. He insisted the inflation figures were out of proportion to the strains of the sudden reopening of economic activity after the easing of COVID-19 public health restrictions, and unusually low prices at the worst of the season. pandemic in 2020 that had worked their way up in year-over-year price comparisons.

Inflation has proven to be not so much “transitory” as sticky and problematic. An unbiased analysis would suggest that, at least for a while, transitory forces dominated the CPI numbers, exaggerating the rate of inflation and the pace of price growth. It was only later – arguably when, perhaps in the fall – that more pervasive economy-wide inflationary forces took over from these “transitional” factors. In retrospect, the Bank of Canada and other central banks were slow to realize this, but they weren’t always wrong.

Nevertheless, the word itself has become a cynical punchline. It’s now impossible to hear Mr. Macklem express his views on inflation without someone, somewhere rolling their eyes and saying, “So what about the ‘transitional’? »

Today, the Governor finds himself arguing once again that short-lived price movements in a narrow commodity band are skewing the inflation picture. He must argue that the decline in the inflation rate, which is expected to continue into August and beyond, exaggerates the degree of improvement. And he will use that argument to justify more rate hikes in the coming months, despite the strains these will put on the economy, household and business finances, and public patience.

He is certainly not wrong when he says that inflation is still far too high. And that whatever relief we get over the next few months from the unsustainable pullback in commodity prices will not be enough to bring us back to any level of comfort.

Yet, after the “transitional” trial and error, the public will understandably be wary of the bank’s position. Many economic experts believe that the underlying economic drivers of inflation are already slowing significantly and that an overly aggressive rate path will send the economy into recession. The central bank’s inflation analysis no longer has the same credibility as a year ago.

With that in mind, Mr. Macklem may need to soften his message. The best communication tool the Bank of Canada could have in the coming months is an open mind.

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