Canada’s central bank was surprised by how strong the excess demand has been. Consequently, the Bank of Canada (BoC) sees elevated inflation sticking around for a little longer. In its latest Monetary Policy Report (MPR), the central bank warns that excess demand has been resilient, helping to create more uncertainty. Now they don’t see the target being reached until 2025, meaning elevated interest rates will stick around a little longer too.
Canadian Inflation Is Decelerating, But Still Way Too High
Canadian inflation has been making progress, but not nearly as fast as it should be. The consumer price index (CPI) showed 3.4% annual growth in May. Down significantly from the 8.0% peak reported last year, but still far from the BoC’s 2 point target. To the average person, it might seem great and that things are now fixed. However, to a person tracking monetary policy, it highlights just how insanely out-of-whack inflation got.
Okay, imagine this—you’re in charge of your company’s budget. The department you took over is typically on budget, but you managed to come in 50% over this time. Not great, right? Now increase that to 70% over, and that’s how well the BoC is managing the depreciation of the currency. The currency is losing money 1.7x the intended rate.
The issue is further complicated by the fact the BoC’s preferred CPI measure has stopped falling. That can indicate interest rates aren’t nearly as high as they should have been.
Canada Won’t See Normal Inflation Until 2025… At The Earliest?
The BoC may seem confident in speeches, but their forecasts are slipping further. The latest MPR shows they don’t see inflation hitting the target rate until 2025. It’s a year longer than previously anticipated, meaning rates need to stay elevated for longer.
Hitting the target by next year might be wishful thinking, if you’re going strictly by the BoC. “Looking ahead, the next stage in the decline of inflation toward target is expected to take longer and is more uncertain,” reads the central bank’s MPR.
Bank of Canada Blames Services & Excess Demand For Slow Progress
Global commodity prices have stabilized, helping to bring down the growth rate. The central bank attributes the higher-than-expected growth primarily to service inflation, and excess demand.
Service inflation adjusts “sluggishly,” explained the BoC. It’s important to understand that service costs aren’t entirely wages, and reflect higher input costs. For example, if rent surges for the venue the services are carried out, they’ll have to recoup the input.
Excess demand, driven by cheap credit and its lingering effects, are also propping up inflation. “Slowing domestic demand is central to the anticipated decline in inflationary pressures,” said the BoC.
They further suggest that excess demand helped price increases more easily pass on. However, they don’t expect it to last as excess demand fades, and higher interest rates throttle credit.