A motorist pumps gasoline at a station in Toronto.Fred Lum/The Globe and Mail
Millions of Canadians are already feeling the pinch from March's spike in natural gas prices.
But to Bank of Canada Governor Stephen Poloz this sudden burst of energy inflation is a passing phenomenon in a much more complex and enduring clash of economic forces.
In a few months, those higher energy bills could be a distant memory. And that's why Mr. Poloz says he's not overly concerned about this kind of inflation.
"Those are, by definition, transitory effects on trend inflation," Mr. Poloz explained this week. "A year from now, they will come out of the numbers."
A 17.9-per-cent jump in natural gas prices helped push the annual inflation rate to 1.5 per cent in March – the fastest pace in nearly two years. That was up from 1.1 per cent in February, and slightly ahead of the 1.4 per cent expected by economists.
Mr. Poloz's apparent indifference highlights the central bank's preoccupation with so-called "core" inflation, which filters out volatile and often temporary energy and food price changes.
In March, the core consumer price index barely budged -- rising 1.3 per cent in the 12 months to March, versus 1.2 per cent in February.
"Headline inflation slightly exceeded consensus expectations, but the more important issue here is that core inflation remains well behaved," Bank of Nova Scotia economist Derek Holt said.
The Bank of Canada looks for evidence that consumer demand is outpacing the ability of the economy to keep pace, such as companies hiking prices because they can't keep up with demand or raising wages because they can't find workers.
Another inflationary factor the bank considers temporary is the Canadian dollar, which has lost about 10 cents (U.S.) in the past year. The cheaper currency is making some imported goods more expensive. But Mr. Poloz says it's likely to be a "one-time" phenomenon, unless the currency falls further.
Many businesses are struggling to raise prices, even as their costs rise, because of intense competition, particularly in the retail sector.
"We have actually gone out and talked to retailers," added Tiff Macklem, the bank's senior deputy governor. "And what we're hearing from them is that this increased intensity of retail competition coming from Wal-Mart, Target, other stores, looks to be more persistent than we previously believed."
Even more important than retail competition is the lingering slack in the economy – unused plant capacity, plenty of unemployed workers and weak demand. And Mr. Poloz and Mr. Macklem say economic weakness is keeping most consumer prices low.
The Bank of Canada released an updated quarterly forecast Wednesday that shows that overall inflation will hit the Bank of Canada's critical 2-per-cent target early next year, pushed up by higher gasoline and natural gas prices plus the lower dollar.
But core inflation is expected to remain persistently low and won't reach 2 per cent until early 2016.
Toronto-Dominion Bank economist Connor McDonald said inflation is on a "slow upward grind."
And that's why analysts don't expect the central bank to react to March's inflation numbers, or what might happen in the months ahead. Most don't expect the Bank of Canada to start hiking its ultra-low 1-per-cent overnight rate until the second half of next year.
The longer-term challenge for Mr. Poloz will be to figure out when transitory inflation becomes something more permanent that he'll need to tame with higher interest rates.