Remarks by Tiff Macklem
Governor of the Bank of Canada
Calgary Chamber of Commerce
September 7, 2023
Calgary, Alberta
Economic progress report: Target in
sight, but we're not there yet
Introduction
It's a
Good afternoon. pleasure to be here. I want to thank the Calgary Chamber
the Bank of Canada's Calgary office
of Commerce and for setting up such an
impressive event. I look forward to meeting with and hearing from many of you
while I'm in
Alberta.
Monetary policy is working to bring inflation down-and we are encouraged by
progress we've made so far.
the Consumer price index (CPI) inflation was 3.3%
in July, roughly in line with what we expected in our July Monetary Policy Report.
Our 2% target is now in sight. But we are not there yet and we are concerned
progress has slowed. Monetary policy still has work to do to restore price stability
for Canadians, and we are committed to staying the course.
In my time with you here, I will begin by discussing our recent monetary policy
decisions. Then I want to dig into the inflation data to give you a sense of what
we're seeing and what
we're looking for on the path to price stability. I also want
to outline the progress we've seen
in rebalancing demand and supply in the
economy. How these evolve will be critical to our policy decisions going forward.
Finally, I want to answer a question we are getting more frequently from
Isn't being close
Canadians: Why are we so focused on the 2% target? to 3%
committed to
good enough? The short answer is no-and I'll explain why we're
getting all the way back to 2%.
Our recent monetary policy decisions
At both our June and July monetary policy decisions, we increased our policy
rate, bringing it to 5%. These were difficult decisions. But they reflected the
accumulated evidence that excess demand in the economy and underlying
inflationary pressures were both proving more persistent. And it was our
judgment that more restrictive monetary policy was needed to restore price
stability for Canadians.
The data since mid-July are providing clearer evidence that higher interest rates
are moderating spending and rebalancing demand and supply in the economy.
However, we remain concerned that overall inflationary pressures are persisting
and larger-than-normal price increases remain broad-based across the goods
and services Canadians buy regularly.
Just as it took longer to see clearer evidence that higher interest rates were
moderating demand in the economy, it may now be taking longer for this to
translate into lower inflationary pressures. We know it takes time for interest rate
increases to work their way through the economy and relieve price pressures.
The other possibility, of course, is that monetary policy is not yet restrictive
enough to restore price stability. And unfortunately, the longer we wait, the
harder it's likely to be to reduce inflation.
In trying to balance the risks of under- and over-tightening, Governing Council
decided yesterday to keep the policy rate at 5% and agreed there may be a need
to raise the policy rate further if inflationary pressures persist.
Going forward, we will be looking for further evidence that price pressures are
easing. To assess the momentum in inflation, we use a broad range of indicators.
Each month, inflation data are buffeted by many factors, some temporary, others
more lasting. Given that monetary policy works with a lag, we need to try to see
where inflation is going. So let me now dig into the data and unpack what we are
seeing and what we are looking for.
Unpacking inflation
We've
been saying for some time that inflation would be close to 3% this
summer. It fell to 2.8% in June before moving up to 3.3% in July, so we are about
where we expected (Chart 1).
Chart 1: Year-over-year inflation has declined
%
10
8
6
4
2
0
-2
Jan-2020 Jul-2020 Jan-2021 Jul-2021 Jan-2022 Jul-2022 Jan-2023 Jul-2023
CPI-median CPI-trim Total CPI
Source: Statistics Canada
Last observation: July 2023
The biggest contribution to the slowing in inflation since the peak last year has
been from energy, which accounts for two-thirds of the slowdown Price
(Chart 2).
increases in consumer durables like furniture and appliances have also slowed
as supply disruptions eased and higher borrowing costs reduced demand.
Chart 2: Prices of gasoline and consumer durables* have contributed to the fall
in inflation from the recent peak
June 2022-July 2022
Percentage points
0 0
-0.11
-0.15
-1 -1
-0.37
-2 -2
-0.99
-3 -3
-4 -4
-5 -5
-4.80
-3.18
-6 -6
Shelter Food from Services Goods excluding Energy Total
stores excluding shelter food and energy
*Consumer durables are included in goods excluding food and energy.
Sources: Statistics Canada and Bank of Canada calculations
Last observation: July 2023
This is welcome progress, but we know that many prices-those for food, shelter
and many services-are not cooling in the same way. And recently global oil
prices have risen again, pushing gasoline prices up. This is expected to increase
headline inflation in the near term. To capture the centre of gravity in inflation, we
use several measures to look deeper than this headline and assess the
underlying trend in inflation.
So let me explain the inflation measures we look at and why.
First, we track measures of core inflation, which exclude large price changes-
whether up or down-that can obscure the underlying trend in inflation. Core
inflation is running around 3.5%. This is true for year-over-year rates as well as
for more timely three-month rates, suggesting inflationary pressures remain and
downward momentum has slowed.
We also carefully examine the distribution of annual price changes across CPI
components. As you can see in panel a of Chart 3, while some prices go up and
others go down, in normal times price changes tend to be clustered around the
2% target. When inflation went up last year (panel b), the distribution of price
changes shifted to the right. The average increase was higher, and the range of
price changes also widened, with some prices increasing very sharply. This
points to one of the unpleasant consequences of inflation-high inflation also
brings bigger swings in prices. Since inflation peaked in June 2022, the
distribution of price changes has started to normalize, but the average price
increase and the variability of price changes are both still higher than normal
(panel c).
Chart 3: The distribution of price changes across the CPI basket has begun to
normalize
a. December 2019
b. Peak, June 2022
c. July 2023
Note: In the chart and text, price changes refer to changes to the component price indexes in the CPI basket. CPI components are weighted
by their respective basket weights. Solid lines indicate means of distributions; the dotted line indicates the 2% inflation target.
Sources: Statistics Canada and Bank of Canada calculations
Last observation: July 2023
Another way to gauge inflation pressures is to look at whether increases in the
CPI reflect a few big price increases or a lot of smaller ones. Inflation is a
generalized increase in prices. To measure the breadth of price increases, we
track the share of CPI components whose prices are rising faster than normal.
When inflation is close to target, typically about 30% of components rise faster
than 3% and about 15% rise faster than 5%. When inflation rose last year, the
share of components rising faster than 3% peaked at almost 80% and 65% were
above 5%. Today, about 60% of CPI components are rising above 3% and about
So we've
45% are rising above 5% (Chart 4). made progress, but
larger-thannormal price increases are still broad-based.
Chart 4: The shares of CPI components rising faster than 3% and 5%
remain too high %
90
80
70
60
50
40
30
20
10
0
2019 2020 2021 2022 2023
Share above 3% Share above 5%
Historical average share above 3% Historical average share above 5%
Note: Historical averages, shown in dotted lines, are from January 1995 to December 2019.
Sources: Statistics Canada and Bank of Canada calculations
Last observation: July 2023
This highlights another problem with high inflation-no matter how carefully you
shop, you can't avoid it.
Prices for almost everything are up, including for many
necessities. For example, rent was up about 5% in July, and home insurance and
cleaning products were both above 9%. Price increases for food average around
9%, with those for many items in double digits-bakery and cereal products were
up 12%, while baby food was up 11%.
The single price increase that is having the biggest impact on CPI inflation is
gone up as we've increased interest rates.
mortgage interest costs, which have
They're
about 30% higher than they were a year ago. When you exclude
mortgage interest costs, CPI inflation is close to 21⁄2%-which has led some to
It's true that if we hadn't raised
argue that inflation is effectively back at target.
interest rates, mortgage costs might be lower today, but inflation throughout the
economy would be a much bigger problem for everyone.
To measure underlying inflation, we need a more systematic way of excluding
components with big movements on both the upside and the downside. Of
course, if you take out only the things that are going up a lot, inflation looks
lower. That's why we use the core measures I mentioned a minute ago. CPI-trim,
for instance, has excluded mortgage interest costs in each of the past 14 months.
Nevertheless, it is still running at close to 3.5%, because it also excludes prices
that have declined sharply.
So the underlying trend shows inflation is still well above target. And the longer
the underlying trend remains too high, the harder it can be to bring inflation down.
Why? Because when households and businesses expect inflation to be above
2%, buying patterns and corporate pricing behaviour adjust. When that happens,
it becomes more difficult to bring inflation back to 2%.
Looking ahead, we want to see less-generalized price increases as well as a
decline in the average price increase. Both of those things are happening, but
they need to keep happening to restore price stability for Canadians.
Slowing demand
That brings me to the other factor we're watching closely: the balance between
demand and supply in the economy. Inflation has come down from 8% because
supply chains have opened up, energy prices have fallen and the big price
increases of a year ago have dropped out of the data. For inflation to continue to
decline, we need demand to continue to grow more slowly than supply for a
period of time. That will relieve price pressures, slow increases in labour costs
what will bring inflation
and restore normal price-setting behaviour. And that's
sustainably back to target.
But I want to be clear-we are not trying to kill economic growth. We want strong,
sustainable growth and a healthy labour market. The best contribution we can
make to these objectives is to deliver low, stable and predictable inflation. Price
stability is a cornerstone of a market-based economy-without it, nothing works
well. The way we achieve price stability is by using the policy interest rate to find
a balance between demand and supply in the economy. Too much demand, and
inflation rises above target. Too little, and inflation falls below target.
We've seen both in the last three
years. At the beginning of the pandemic,
demand collapsed and inflation fell below 1%-and was even briefly negative.
We used all of the tools at our disposal to support the economy so that
Canadians could continue to pay their bills, businesses could stay afloat and
people would have jobs to go back to when the shutdowns ended.
As economies around the world reopened, supply chains became tangled and
demand for goods and services came roaring back. Businesses could not keep
up with demand, prices rose quickly and inflation became a big problem. The
shift into excess demand required the opposite policy reaction, and we raised
interest rates forcefully to dampen growth, give supply time to catch up and
relieve price pressures.
So how well is it working? The output gap-the difference between total
the economy and the economy's productive
spending in capacity-provides the
broadest measure of that balance. By our estimates, excess demand peaked in
the first half of last year. That's when the economy was
the most overheated.
Since then, excess demand has eased gradually. Last week, gross domestic
product (GDP) data showed that growth for the second quarter was essentially
zero. That means that growth has averaged a little less than 1% over the last
our best estimate is that the economy's
three quarters, and productive capacity
has grown at a rate of a little over 2%. The cumulative effect is that the excess
demand in the economy has diminished substantially. This should reduce price
pressures, leading to lower inflation.
The weakness in second-quarter GDP largely reflected a broad-based slowing in
consumer spending and a decline in housing activity. The softening in household
spending on goods was most pronounced on larger items people often buy on
credit, such as furniture and durables for outdoor recreation. Together with the
decline in housing activity, this points to the moderating effect higher interest
rates are having on household spending. Consumption of services also slowed,
which may indicate that the effects of tighter monetary policy are broadening
from goods to services. The weakness in overall economic growth was magnified
by a few unexpected events. Most notably, devastating wildfires across the
country have destroyed homes, evacuated cities and weighed on economic
activity across several sectors. Alberta has been hard hit, and this has disrupted
oil and gas production in particular.
The labour market is also an important indicator of the demand-supply balance in
seeing signs that
the economy. We're labour demand is cooling from overheated
levels earlier in the year, allowing labour supply to begin to catch up with
demand. Employment was roughly flat in July, marking the fifth time in the last six
months that job growth has been below the pace implied by population growth
(Chart 5).
Chart 5: Employment growth has been below population growth in recent months
Net monthly job gains, seasonally adjusted, 3-month moving average
Thousands
100
80
60
40
20
0
-20
Jul-2022 Oct-2022 Jan-2023 Apr-2023 Jul-2023
Actual employment growth Employment growth implied by population growth
Sources: Statistics Canada and Bank of Canada calculations
Last observation: July 2023
So far, we've been able to cool demand without unemployment
spiking. As I
outlined last November, the fact that job vacancies were at a record high meant
we had scope to cool the labour market without causing a large surge in
unemployment. Nearly a year later, we can see that job vacancies have indeed
fallen significantly (Chart 6), with only a small increase in the unemployment
rate.
Chart 6: Job vacancies have continued a downward trend
%
100
60
20
-20
-60
2020 2021 2022 2023
Job Vacancy and Wage Survey Indeed
Note: Job Vacancy and Wage Survey (JVWS), change from 2019 average (seasonally adjusted), and Indeed online job postings, change
from the average of the same month in 2018 and 2019 (not seasonally adjusted). Due to data limitations at the onset of the
pandemic, JVWS job vacancies data are unavailable from April to September 2020.
Sources: Statistics Canada, Indeed and Bank of Canada calculations
Last observations: JVWS, June 2023; Indeed, August 2023
Wage growth, in contrast, has yet to show clear signs of moderation, with most
measures around 4% to 5%. As the labour market continues to come into better
balance, we expect wage growth will slow. We will be watching wage growth
closely for evidence that confirms this rebalancing.
Another indicator of the imbalance remaining between demand and supply-and
thus of underlying inflationary pressures-is corporate pricing behaviour. As the
economy reopened from pandemic restrictions and many costs rose quickly,
companies protected their profit margins by passing all of their cost increases
along to customers. They did this by increasing the prices for their products more
often and by more than usual.
As inflation comes down, businesses tell us their pricing-setting behaviour is
beginning to normalize. Businesses increasingly expect the size and pace of
price changes to decline. But corporate pricing behaviour is not yet back to
normal, and it appears to be changing only slowly. In our second-quarter
Business Outlook Survey, businesses said they still see high demand for many
goods and services, and they remain worried about their costs. They still intend
to change prices more frequently than normal over the next 12 months.
As long as demand is running ahead of supply in the economy, it's
too easy for
businesses to raise their prices. We will be watching corporate pricing behaviour
carefully to be assured that the economy is clearly on the path to price stability.
So that's what we've seen
in recent months and what we are watching closely. In
October we will publish a new economic outlook. We will be looking for continued
progress toward the economic rebalancing we need to relieve inflationary
pressures and for more evidence that this is translating into lower underlying
inflation.
The 2% Target
it's
That brings me to a question we are increasingly getting from Canadians: If
and
going to be difficult to get to our 2% inflation target, we'll be closer to 3% for
why don't we raise the target to 3%?
some time, Besides, if the control range
is 1% to 3%, aren't we
around the target close enough?
We understand why people are asking this question. Higher interest rates are
painful. But getting to the 2% target is worth it. I want to be clear-we are
committed to the 2% target. And for good reason.
don't raise the target just because
First, you you missed it. We've been targeting
2% inflation since 1995, and the inflation target anchors our economic and
financial system. If you get rid of the anchor, or move it when the going gets
tough, inflation itself gets less predictable and more volatile. Nobody wants that.
Second, the 2% target has delivered low and stable inflation and lower
unemployment rates on average for 25 years in Canada. Most central banks
inflation is low enough that people don't need
have a 2% target because, at 2%,
to worry about changes in their cost of living from one year to the next. And we
have a lot of evidence that, for many years now and in many countries, 2%
inflation has worked to deliver historically superior macroeconomic performance.
the
Third, the target is not 1% to 3%-it's 2% midpoint of the range. The 1% to
3% range conveys where Canadians can expect inflation to be most of the time.
Between 1995 and 2019, inflation was in the 1% to 3% range 80% of the time.
But to be in this range most of the time, we have to aim for the middle. If we
decide 3% is good enough, inflation will be above the range a lot of the time.
The bottom line is the 2% target is eminently achievable and has served
Canadians well. Simply put, when inflation is stable around the 2% target, it
removes the anxiety created by large swings in the cost of living. Price stability
means households and businesses can plan and invest with confidence that their
money will hold its value.
I want to make one final point. We review our monetary policy framework,
including our target, every five years so that we can be confident that it remains
fit for purpose. This is a strength in our framework. Looking ahead, Canadian
businesses, households and governments will need to confront some big global
forces, including demographic changes, rising geopolitical tensions, climate
change and digitalization. Some of these forces could add cost pressures and
increase the volatility of prices.1
Some commentators have suggested this means we should target a higher rate
of inflation. Understanding these forces and what they mean for monetary policy
is at the very heart of delivering on our mandate. But it is not obvious that
allowing for higher inflation will help us deal with these challenges. To the
contrary, more inflation and the uncertainties that come with more volatility in
inflation may make the needed adjustments even more difficult. These aren't the
first structural changes to confront the Canadian economy. The past 30 years
have shown us that the 2% target has been a helpful anchor as businesses,
households and governments face shifting economic forces.
As with past reviews, we will work hard to analyze how the framework, including
the 2% target, has been working and whether it's the best framework for the
future.
Conclusion
It is time for me to conclude.
We've
come a long way in the past year. Monetary policy is working, and inflation
is coming down. But we still have some way to go to restore price stability. With
past interest rate increases still working their way through the economy,
monetary policy may be sufficiently restrictive to restore price stability. However,
Governing Council is concerned about the persistence of underlying inflation.
Inflation is still too high, and there is little downward momentum in underlying
inflation.
We will be carefully assessing the balance between demand and supply and
underlying inflation to gauge progress toward price stability. If we need to raise
interest rates further to restore price stability, we are prepared to take further
we don't want to raise our policy rate more than we have to.
action. But
and we don't
We know higher interest rates are hitting some Canadians hard,
want this to be any harder than necessary. But letting too-high inflation persist
- 10 -
would be worse. We are confident that 2% is the right target. The target is now in
sight. We need to stay the course.
I look forward to your questions. Thank you.