Remarks by Tiff Macklem
Governor of the Bank of Canada
Halifax Chamber of Commerce
October 6, 2022
Halifax, Nova Scotia
What's happening to inflation and
why it matters
Introduction
It's
Good afternoon. I am glad to be with you here in Halifax. been a tough couple
of weeks for Atlantic Canada. I want to extend my condolences for the lives lost
during the terrible storm. My sympathy goes out to all of those affected across
the region, including Bank of Canada employees in our office here in Halifax. The
damage and destruction bring a new wave of hardship after what has already
been a difficult couple of years.
Canadians have faced historic challenges since 2020. And recovering from these
challenges-just like rebuilding from the aftermath of Hurricane Fiona-will take
time. The global COVID-19 pandemic has sparked a challenge that is particularly
what I want to talk
pressing to the Bank of Canada-high inflation. And that's
about today.
High inflation is making life more difficult for Canadians, especially those with low
or fixed incomes. Some of this inflation reflects global developments that we
don't control, but inflation in Canada reflects what's happening in
increasingly
Canada. The demand for goods and services here at home is running ahead of
economy's ability to supply them. Businesses are having a hard time finding
the
enough workers. And what started as higher prices and delays for many
internationally produced goods has broadened to many services.
Inflation in Canada peaked at 8.1% in June and has declined for two months.
That's welcome news, but inflation will not fade away by itself. To get
it back to
more normal levels, we need to slow spending in the economy so supply can
catch up with demand. This will help relieve price pressures here in Canada.
In September, we raised our policy interest rate for the fifth consecutive time
since March. And we indicated that interest rates will likely need to go higher still
to bring inflation down to the 2% target. Later this month, we will take our next
monetary policy decision, and we will update our economic outlook for growth
and inflation at that time.
But today I want to do three things. First, I want to unpack the run-up in inflation
over the past year or so and review how the factors behind inflation in Canada
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are shifting from global to domestic and from goods to services. Second, I want
to review the inflation indicators we are particularly focused on as we assess
where inflation is headed. Finally, I want to acknowledge the hardship that high
inflation is creating for many Canadians and underscore the imperative of getting
inflation all the way back to the 2% target.
The sources of inflation are broadening
Canada's
Heading into the pandemic in 2020, total consumer price index (CPI)
inflation was 2.2%-roughly on target. But when the world locked down, inflation
fell steeply, dipping below zero. Prolonged deflation and economic depression
were real concerns. The Bank responded with exceptional monetary support, first
to put a floor under the crisis and then to help the economy regain its strength.
Fortunately, combined with exceptional fiscal stimulus, it worked. We avoided
deflation, and the deepest recession on record was followed by the fastest
recovery ever.
But repeatedly closing and reopening economies around the world brought new
challenges. Households shifted their spending from in-person services to durable
goods, straining global supply chains that were already disrupted by public health
restrictions. Shipping bottlenecks and shortages of key intermediate inputs meant
long delays for goods like cars, bicycles and appliances. So by 2021, we began
experiencing higher prices for many internationally traded goods.
As Chart 1 shows, inflation in goods excluding food and energy rose to about
3.5% by July 2021, while inflation in services excluding shelter was only around
1%. Add in higher global energy prices in 2021, and goods price inflation was
about 4.5% by the middle of that year.
Chart 1: Inflation started in goods and spread to services
Year-over-year percentage change
%
9.0
7.0
5.0
3.0
1.0
-1.0
2020 2021 2022
Goods excluding food and energy Services excluding shelter Total inflation
Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2022
With higher goods prices, total CPI inflation was moving up in 2021 too, but it
was largely a story of higher inflation for global goods spilling into Canada.
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Inflation was rising in most advanced economies, and Canadian households
were feeling the effects of higher global inflation
(Chart 2).
Chart 2: Inflation has risen globally
Total CPI, year-over-year percentage change
%
12
8
4
0
-4
2019 2020 2021 2022
France Germany Italy
Japan United Kingdom Australia
New Zealand United States Canada
Note: Australia and New Zealand are using quarterly data, all other countries use monthly data. Last observations:
Sources: Statistics Canada and Organisation for Economic Co-operation
Australia and New Zealand 2022Q2;
and Development via Haver Analytics all others, August 2022
At the time, we assessed that the effect of these global forces on inflation was
likely to be transitory. Historical experience has taught us that supply
disturbances typically have a temporary effect on inflation, so we tend to look
through them. A year ago we expected inflation in goods prices to moderate as
public health restrictions were eased, production ramped up and investment in
global supply chain logistics picked up. In hindsight, that turned out to be overly
optimistic.
Indeed, global inflationary pressures stepped up in 2022. The unprovoked
Russian invasion of Ukraine in February drove up the prices of commodities-
particularly energy and agricultural goods-and created new disruptions to
already impaired global supply chains. Canadians experienced these effects
almost immediately with higher gas prices at the pump and big price increases
for many basic food items at the grocery store.
But the other thing that changed in 2022 was inflation in the prices of services.
As the economy fully reopened in the spring, pent-up demand for all the services
we'd missed
over the pandemic started driving up their prices, especially in areas
like travel and recreation. Canadians experienced these pressures first-hand
when trying to book a campsite or reserve a table at their favourite restaurant.
Services price inflation rose quickly through the first half of 2022, reaching about
5% this summer.
With further increases in goods prices in 2022 and a rapid rise in services prices,
total CPI inflation rose sharply, reaching 8.1% in June.
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Over the last two years, the pandemic and the war have affected lives and
livelihoods. They have also had a profound impact on inflation. Our job at the
Bank of Canada is to restore price stability.
Global inflation may be starting to ease
In the last two months, headline inflation in Canada has come down to 7%. This
largely reflects lower gasoline prices. In mid-June, filling up in Halifax cost $2.15
a litre on average. By the end of August, that had fallen to $1.64.
More generally, there is some evidence that global inflationary forces have begun
to ease, though they remain elevated. A range of global commodity prices are
starting, finally, to fall from their highs. Oil prices have come down, and the prices
for key agricultural commodities have also eased back. In time, with lower input
and transportation costs, we should see food inflation begin to come down.
Supply bottlenecks have also begun to improve (Chart 3).
Chart 3: Global supply bottlenecks are beginning to ease but remain elevated
Monthly data
Index Index
80 800
70 600
60 400
50 200
40 0
2019 2020 2021 2022
PMI manufacturing supplier delivery times (seasonally adjusted, +50 indicates lengthening) (left scale)
PMI manufacturing input prices (seasonally adjusted, +50 indicates increasing) (left scale)
Harper Petersen shipping cost index (2019 = 100) (right scale)
Ships in queue at Los Angeles and Long Beach (2019 = 100) (right scale)
Note: "Ships in queue at Los Angeles and Long Beach" is an "end-of-period value".
"Harper Petersen shipping cost index" is an average of weekly data.
Sources: Harper Peterson, The Marine Exchange of Southern California and S&P Global via Haver Analytics Last observation: September 2022
Global manufacturers report that delivery times are still longer than usual, but
they are getting shorter, and input cost pressures are easing. Global shipping
costs have also come down from exceptional highs.
can't
These signs of improving global supply chains are encouraging, but we
count on easing pressure on global prices to lower inflation in Canada. At a
minimum, improving global factors will take time to filter through to Canadian
inflation. And the recent depreciation of the Canadian dollar in the face of
USdollar strength will offset some of this global improvement by making US goods
and vacations more expensive for Canadians. There is also considerable
uncertainty about the evolution of global supply chains and commodity prices.
The global economy remains highly disrupted by the effects of the pandemic and
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price movements isn't
the war in Ukraine. Predicting international easy, and the
Unfortunately, we don't have much
global inflation picture could change quickly.
influence over that.
Our focus is getting domestic inflation down and keeping
inflation expectations anchored
can't control
We 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.
All the signs today point to an economy that is clearly in excess demand. Labour
markets remain very tight. Job vacancies have eased a little in recent months but
remain exceptionally high. Our business surveys report widespread labour
shortages. And wage growth has risen and continues to broaden.
With demand running ahead of supply, competition is posing less of a restraint
on price increases, and businesses are passing through higher input costs more
quickly. As a result, higher energy and material costs are showing up in the
prices of a growing list of goods and services. So even if there is some relief at
the gas pumps, price pressures remain high and continue to broaden. In August,
the prices of more than three-quarters of the goods and services that make up
the CPI were rising faster than 3% (Chart 4).
Chart 4: Inflationary pressures remain broad-based
Share of CPI components that are growing
%
80
60
40
20
0
2015 2016 2017 2018 2019 2020 2021 2022
Above 3% Above 5% Above 7%
Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2022
That doesn't mean
Simply put, domestic inflationary pressures have yet to ease.
higher interest rates are not working, but it will take time. By raising interest rates,
we are making it more expensive for households and businesses to borrow and
therefore to spend. In five steps since March, we have raised the overnight policy
rate from 0.25% to 3.25%-one of the steepest and fastest tightening cycles
we've ever conducted. And we are starting to see some effect. Some
interest-
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rate-sensitive sectors of the economy have begun to cool. The housing market
had overheated to unsustainable levels early in the pandemic due to low supply,
increased demand for larger homes and low mortgage rates. With higher rates
now constraining borrowing, the sector has cooled.
But monetary policy takes time to work its way through the whole economy.
Households or businesses making a big purchase or investment-one that
requires a loan-are feeling the impact. It takes longer for monetary policy to
bring down price growth in other goods and services-especially services-
because they aren't directly tied to borrowing.
Instead, they adjust over time as
overall spending moderates.
What we're watching
In her September economic progress report, Senior Deputy Governor Carolyn
Rogers outlined what the Bank is monitoring to guide our decisions in the months
ahead. She explained that we will focus on how monetary policy is working to
slow demand, how supply challenges are resolving, and, most importantly, how
both inflation and inflation expectations are responding.
I want to drill down on these latter two elements: measures of core, or underlying,
inflation and measures of inflation expectations. These are critical guideposts for
us as we seek to bring total CPI inflation all the way back to the 2% target.
Core inflation
As we look for a more fundamental turning point in inflation, measures of core
inflation are becoming increasingly relevant.
We are an inflation-targeting central bank, and we target total CPI inflation-
calculated using a basket of goods and services that represents what Canadians
typically buy. But parts of the overall CPI basket are sometimes highly volatile in
ways not related to broader price pressures-this can be the case for gasoline
That's why like to look at what we call "core"
and food prices. policy-makers
inflation to gauge persistent price movements. Core inflation provides a sense of
the underlying trend in total CPI inflation and relates more closely to the balance
between demand and supply in our economy.
In practice, there are different ways to measure core inflation. Traditionally,
central banks in many countries have measured core inflation by excluding
volatile components like food and energy.1 The drawback of these
exclusionbased measures is that the components that are volatile can change over time-
something we have experienced in a big way in the last couple of years.
We continue to monitor various exclusion-based measures of core inflation, but
since 2016, the Bank has focused on three more-statistical measures of core
inflation. CPI-median and CPI-trim strip out whatever is volatile at the time. The
third measure, CPI-common, is based on a statistical technique that captures the
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common component in the price changes across many goods and services. This
captures the idea that inflation reflects a general increase in prices.
We use three measures of core inflation because no single measure is best.
Depending on the circumstances, one may be a better indicator of inflationary
pressure, and their diversity is their strength.
With inflationary pressures as strong as they are, all three measures have risen.
They currently range between 4.8% and 5.7% What they are telling us
(Chart 5).
is that even after taking out components in the CPI that are volatile or don't
5%. That's too
reflect generalized changes in prices, inflation is running about
high.
We can also see that our core measures have yet to decline meaningfully even
though total CPI inflation has come down in the last couple of months. Going
forward, we will be watching our measures of core inflation closely for clear
evidence of a turning point in underlying inflation.
Chart 5: Core measures show strong underlying inflationary pressures
Year-over-year percentage change
%
9.0
7.0
5.0
3.0
1.0
-1.0
2015 2016 2017 2018 2019 2020 2021 2022
CPI-common CPI-common (real time) CPI-median
CPI-trim Total CPI
Note: Real-time refers to the initial unrevised reading of CPI-common over each month of the pandemic.
Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2022
Of our three measures, CPI-common is becoming more difficult to use in real
time because it has been subject to large historical revisions. With price
movements becoming much more generalized in the last year, what is included
in the common component has changed considerably.2 CPI-trim and
CPImedian, in contrast, are more robust to changes in the behaviour of prices.
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These measures appear to have performed well and have been subject to much
smaller revisions. With this in mind, we are more focused on these two measures
and we are reassessing CPI-common.
The extreme events of the pandemic have stressed Canadians. They have also
stressed some of our indicators and highlighted the benefits of using a variety of
measures.
Inflation expectations
In addition to measures of inflation, we are also closely watching inflation
expectations. Keeping longer-term expectations of inflation well anchored is
paramount so that, as inflation pressures ease, inflation returns to the 2% target.
The longer high inflation persists and the more pervasive it becomes, the greater
the risk that high inflation becomes entrenched. In particular, if high inflation
pushes wages up and higher labour costs then push inflation up further, inflation
expectations can become unmoored and high inflation can become self-fulfilling.
We can't let that happen because if it
does, it will be much more costly to return
inflation to target.3
That's why we are
so focused on measures of expected inflation. We use a
range of surveys and market-based measures to assess expectations of future
inflation, and they show us that near-term expectations have risen. Survey
results also indicate that consumers and businesses are more uncertain about
future inflation and more of them expect inflation to be higher for longer. So far,
longer-term inflation expectations remain reasonably well anchored, but we are
acutely aware that Canadians will need to see inflation clearly coming down to
sustain this confidence.
This increased uncertainty heightens the risk that inflation expectations could
become de-anchored. Both households and businesses view inflation pressures
as mostly global, but increasingly they are identifying domestic pressures-this is
similar to our own view. Results from our next consumer and business surveys,
which we will release later this month, will be important for our assessment of
how expectations have evolved.
Conclusion
It's time for me to conclude.
Low, stable and predictable inflation is fundamental to a well-functioning
economy with sustained growth and shared prosperity. That's why price stability
is the main objective of monetary policy in Canada. Without price stability,
nothing works well.
High and unpredictable inflation creates uncertainty and unfairness, distorting
decisions and undermining confidence in our economic system. It erodes the
value of money. It distorts and confuses the information and incentives that
consumers, entrepreneurs, savers and investors rely on to make their economic
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decisions. That means workers and businesses have less to show for their work,
and it's harder for everyone to plan for the future.
Plain and simple, high inflation feeds frustration and creates a sense of
helplessness.
an economy where households and businesses don't have
We want to guess
where inflation is going to be. We want an economy where the money Canadians
earn from their hard work keeps its value. We want an economy where
businesses have the confidence to invest. And we want an economy where
workers make real wage gains underpinned by rising productivity.
That is why we have taken forceful action to restore price stability. We have
raised our policy interest rate by three percentage points this year in five steps,
and we are reinforcing these increases with quantitative tightening.
Looking ahead, the Governing Council recognizes that it will take time for past
interest rate increases to have their full effect on the economy and inflation.
That's why
we'll be carefully assessing the effects of our actions as we seek to
slow spending and return inflation to the 2% target. Canadian economic data
over the summer have come in largely in line with our July outlook, and
forwardlooking indicators suggest the economy is slowing. However, labour markets
remain tight, the economy is in excess demand, and we have yet to see clear
evidence that underlying inflation has come down. When combined with
stillelevated near-term inflation expectations, the clear implication is that further
interest rate increases are warranted. 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 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.
Atlantic Canadians will rebuild after this storm as they always have. And the
Bank of Canada will control inflation as it has for the last 30 years. We are
resolute in our commitment to restore price stability for all Canadians.
Thank you.