It seems a lot of people are confused about inflation, including the head of Canada’s central bank. Today, Bank of Canada (BoC) governor Tiff Macklem addressed the US Council on Foreign Relations. His address mostly focused on global currency, but it was the media Q&A where things got interesting. Over three questions, he made several conflicting points about inflation and the economy. At some point, he even acknowledged the issue is more complicated than he expected. But he was certain he’s right… but about what, was unclear.
Supply Shortages and Shipping Bottles Necks Exacerbate Inflation
Governor Macklem referenced a common headline these days — supply and shipping. There are well-established supply shortages and shipping congestion has exacerbated prices. Over the past few months, demand sparked by low rates has resulted in a shipping squeeze. These costs are pushed further by rising high fuel costs, and health-related capacity restrictions.
These factors began to appear at the end of the year, and don’t look as transitory as thought. Just yesterday, the National Bank of Canada said, it looks like stagflation. “Since August, a few things we’ve seen. The disruption to the supply chain and shipping bottlenecks — they’re continuing and they could be more persistent than we previously thought,” said the governor.
Inflation Is An Illusion, But Due To Temporary Factors
Odd, but sums up Governor Macklem’s take, demonstrating how unknown the environment is. Responding to a question on inflation, he attributed it to both optics and the supply chain. That is, he dismissed high inflation as an illusion, but also blamed supply shortages.
By optics, I’m referring to the base effect. This is when a period of artificially low growth is compared to one with modest growth. As a result, the growth looks much larger than the actual impact. It amplifies the reading, but it’s not really felt. This is true for segments, but economists feel he’s exaggerating the exaggeration. Still, Macklem reiterated the point to his global audience.
“… the implications for inflation will be temporary. Prices have come back up, part of that is base year effect [since] prices were very low a year ago. They’ve normalized part of that,” he said.
Supply chain disruption is more complicated, with less clarity on when they’ll end. Public health restrictions have reduced staffing capacity, resulting in lower production. A microchip shortage is pushing the cost of vehicles and electronics higher. Rising demand sparked by low rates are also a factor. There’s a shortage of houses and cars, but let’s not forget sales are near a record high. We’re ignoring that last point though.
The disruptions are more difficult to resolve without cooling demand using policy. This makes it hard to figure out how long it will last, for obvious reasons. The governor still believes they’re temporary, but sounded less sure.
He confidently assured people, “we will work through these supply disruptions…” Right before adding, “…but I will say they are proving to be more complicated and they could last a little longer than we previously thought.” No shit.
The Inflation Is Temporary… But Persistent?
Got it. Inflation doesn’t exist, but if it does it’s just temporary… but there’s no foreseeable end. I know, it sounds confusing. Yet, that’s what he said during the Q&A.. “… we do expect that these effects will be temporary even if they are somewhat persistent,” said Yoda. I mean, Governor Macklem.
There was good news though. “…we do expect to continue to see a good recovery in the second half of this year,” he added. Though he went on to say, “… it could be a little slower… it could take a little longer than we expected…”
To wrap up, inflation is temporary but persistent. It’s an illusion but also caused by fundamental factors. Inflation will temper itself soon. Or it might not, but the economy will recover in the second half. Unless it recovers slower, and then it takes longer. If that gave you zero insights, congrats. You are about as informed as the head of Canada’s central bank as of this morning.
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