The Bank of Canada is downplaying concerns about inflation, arguing that supply-chain bottlenecks will clear as the economy normalizes while overall slack will continue to put downward pressure on prices.
The central bank expects inflation to stay around 3 per cent for several months before falling back toward the bank’s 2-per-cent target later this year, deputy governor Tim Lane said in a speech Thursday that laid out the bank’s rationale for its rate decision on Wednesday.
Above-target inflation is largely the result of temporary factors – notably year-over-year comparisons for gasoline prices – that will dissipate over time, he said.
“These base-year effects are, by definition, transitory – they will not persist beyond the next few months. What will persist until we see a complete recovery is the underlying slack in the economy,” he said.
Mr. Lane’s optimistic take on inflation came on the same day the United States reported an annual inflation rate of 5 per cent in May, the highest reading since 2008. Core inflation in the United States, which excludes volatile food and energy prices from the Consumer Price Index, jumped 3.8 per cent last month year-over-year.
Canada’s most recent inflation reading for April saw the CPI jump 3.4 per cent year-over-year.
There are factors that could push inflation persistently above the bank’s forecast, Mr. Lane said, pointing to high commodity prices, supply-chain disruptions for products such as semi-conductors and wage pressures resulting from the difficulty of finding workers. But he said that “these supply-chain bottlenecks will likely become unblocked as things normalize.”
“The global economy shut down very rapidly but unevenly last year, and it’s been reopening also very rapidly. And as it reopens you’ve got some imbalances, where certain things are in short supply, and so you do have upward pressure on prices of some of those important inputs,” Mr. Lane said in a news conference after the speech.
“At this point our baseline interpretation is that’s something that’s temporary.”
National Bank Financial rates strategist Taylor Schleich said the Bank of Canada is following the lead of other central banks, including the U.S. Federal Reserve and the European Central Bank, in playing down inflation risks.
“Our view is that [inflation pressures are] less transitory and stronger than they’re leading on. And I think [the Bank of Canada] even kind of admitted that because inflation has come out stronger than they projected in April,” Mr. Schleich said in an interview.
“It’s fair to say that [supply-chain issues are] transitory, but our view of transitory is a lot longer than what the central banks are letting on. They’re kind of suggesting this is just a few months. We think we could be talking about this for the rest of the year and in 2022.”
On Wednesday the bank opted to leave its monetary policy levers unchanged. It reiterated that it does not expect to raise rates until the second half of 2022 at the earliest and said it will continue to buy about $3-billion worth of government bonds each week as part of its quantitative easing program.
In his speech, Mr. Lane highlighted the fast pace of vaccinations and strength of the U.S. economy as reasons to be optimistic about a strong economic rebound over the summer. But he cautioned that “we are still a long way from a complete economic recovery.”
In addition to explaining the central bank’s views on inflation and the economy, the major theme of the speech was how the pandemic has accelerated the digitalization of the Canadian economy. Mr. Lane said the rapid adoption of digital technology, which has enabled the work-from-home and e-commerce economy of the pandemic, has the potential to significantly increase productivity.
“The digital transformation has not only been very helpful during the pandemic, but it also stands to increase our productivity and, in turn, our growth potential for years to come,” he said.
He did caution, however, that a more digital economy could leave some workers behind, particularly groups that have already been hard-hit by the pandemic: women, racialized Canadians and young people.
“This is a key policy challenge. Education, job training and labour market policies are essential to prepare Canadian students for the digital economy and to enable workers to transition to the jobs of the future. Governments, academic institutions and businesses all have roles to play here,” he said.
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