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Royal Bank of Canada chief executive officer Dave McKay.Frank Gunn/The Canadian Press

Royal Bank of Canada chief executive officer Dave McKay says “persistent inflation” is building and that some CEOs disagree with central bankers’ assurances that current lofty inflation rates should be temporary.

Even as Canadian employment has recovered to levels seen before the COVID-19 pandemic, employers still face labour shortages that are driving up wages, Mr. McKay said at a virtual event held by the Institute of International Finance (IIF) on Wednesday.

Productivity has slowed in some areas, he said, and as new jobs are created in emerging sectors, existing jobs aren’t being filled or replaced at the same rate.

“I’d say there is persistent inflation building,” Mr. McKay said, which is “more permanent … than temporal. But that’s a big disagreement between central bankers and those CEOs who see the world quite differently.”

Last week, Bank of Canada governor Tiff Macklem said high inflation could be “a little more persistent” than the central bank previously thought, and that the economic recovery could be slower. But he still said the current spike is the result of temporary factors, such as supply-chain disruptions and year-over-year price comparisons.

Inflation hit an 18-year high of 4.1 per cent in August, and has run higher than the central bank’s target rate of 1 per cent to 3 per cent since April. The International Monetary Fund (IMF) said this week that it expects high inflation to recede in most advanced economies by the middle of next year, but that central banks need to be “vigilant” about the possibility that supply-chain issues could yet stoke core inflation.

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Mr. McKay said that although the prospects for economic recovery still look “choppy and uncertain,” he is bullish. In the near term, he said supply-chain issues that have kept containers sitting in ports and public-health restrictions that leave restaurants half empty are holding back spending, delaying the release of pent-up demand.

But a central disconnect between some CEOs and central bankers stems from their differing expectations about how – and how quickly – consumers and businesses may spend the huge piles of excess cash they have saved in deposit accounts over the course of the COVID-19 pandemic.

Canadian consumers typically hold about $40-billion in cash accounts, but now have a combined $310-billion on hand. Add excess business deposits to that and at least $500-billion in cash is “just sitting there waiting to be spent, unable to be spent,” he said. “That’s 25 per cent of Canadian GDP.”

Banks are closely monitoring those deposits to see how much moves to investment accounts, to pay down debt or is spent on goods and services.

“Central bankers think it’s going to be a decade [before that excess cash is fully spent], and it’s largely going to go to pay down debt first. Corporate CEOs think it’s going to get consumed and therefore create demand,” Mr. McKay said. “And the balance between those two routes, I think, is one of the biggest drivers of where we’re going to come out on the inflation rate and the growth rate.”

At Wednesday’s IIF event, Fidelity International CEO Anne Richards said “there is clearly pent-up demand,” but she is wary that the pandemic will leave lasting marks that make people more averse to taking risks.

“If you have been bitten by a shark, you are much more nervous to go swimming again, even if it’s in the local pool. … And if you’ve lived through a global pandemic, it will affect the animal spirits of society at large for a period of time,” she said. “I think it makes it a more complex growth pattern from here than simply saying, there’s a bunch of cash there, a lot of pent-up demand, we’re off to the races. I don’t think it’s quite that simple.”

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