Is anyone going to believe the Bank of Canada anymore?

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Tiff Macklem spent much of the second half of 2021 trying to convince Canadians that rising inflation numbers were not all they were cracked up to be. He now finds himself making a similar argument in the opposite direction – as the dampener of enthusiasm for inflation’s downward turn.

The Governor of the Bank of Canada set to work raining on the parade within hours of Tuesday’s consumer price index (CPI) report, which showed July’s inflation rate falling to 7.6 per cent from 8.1 per cent in June – the first decline in 13 months. His message: “Inflation in Canada has come down a little, but it remains far too high.”

Mr. Macklem stressed that while some of the biggest drivers of the extreme gains in consumer prices have gone into reverse – specifically, gasoline, agricultural commodities and global shipping costs – many of the key underlying inflation pressures are still in place. Supply-chain disruptions linger. The war in Ukraine continues. Most importantly, Canadian domestic demand still exceeds supply.

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The implication is that, even as the downturn in those commodity prices looks likely to continue to take the heat off the overall year-over-year inflation rate, the central bank remains steadfast in raising interest rates to cool demand. This isn’t the inflation relief the bank is looking for. Not yet.

“Tuesday’s inflation number offers a bit of relief, but unfortunately, it will take some time before inflation is back to normal. We know our job is not done yet – it won’t be done until inflation gets back to the 2-per-cent target,” Mr. Macklem concluded.

The very nature of his comments – he wrote them in an opinion column published by the National Post (in English) and La Presse (in French) – is unusual in itself. Newspaper op-eds are a rarely used communications tool for the Bank of Canada. The Governor doesn’t typically volunteer public comment on key economic indicators the day they are released; the bank’s style is to play its analytical cards close to its chest until it has a more formal platform to share its thoughts.

Mr. Macklem’s published commentary is testament to how important he feels it is for the bank to stay ahead of public sentiment around inflation. He wasn’t prepared to sit on his message and let any misunderstandings fester until the next Bank of Canada rate announcement (certainly another increase), three weeks from now.

But this message sounds strangely familiar, albeit in quite a different context. I’m talking about the “transitory” talk around inflation from central bankers last year – which became a major policy and communications blemish for Mr. Macklem and his colleagues.

As the inflation rate accelerated around the middle of last year, the Bank of Canada repeatedly argued that the increases were largely temporary in nature. It insisted that the inflation numbers were being driven out of proportion by strains from the sudden re-opening of economic activity after COVID-19 public-health restrictions were eased, and by unusually weak prices during the worst of the pandemic in 2020 that had worked their way into the year-over-year price comparisons.

Inflation proved not to be no so much “transitory,” as sticky and problematic. A fair-minded analysis would suggest that, at least for a while, transitory forces did dominate the CPI numbers, exaggerating the rate of inflation and the pace of price growth. It was only later – it’s debatable when, perhaps sometime in the fall – that more pervasive, economy-wide inflation forces took over from those “transitory” factors. In hindsight, the Bank of Canada and other central banks were late in catching that, but they weren’t always wrong.

Nevertheless, the word itself has become a cynical punchline. It’s now impossible to hear Mr. Macklem express his views on inflation without someone, somewhere, rolling their eyes and saying, “So, what about ‘transitory’?”

Now, the Governor finds himself arguing once again that short-lived price movements in a narrow band of commodities are skewing the inflation picture. He must make a case that the downturn in the inflation rate, which is likely to continue in August and beyond, is overstating the degree of improvement. And he will use this argument to justify more rate increases over the next few months, despite the strains those will put on the economy, household and business finances, and the public’s patience.

He’s certainly not wrong when he says that inflation is still far too high. And that whatever relief we get in the next few months from the retreat of unsustainably high commodity prices won’t be nearly enough to return us to any kind of comfort level.

Yet after the “transitory” fumble, the public will be understandably wary of the bank’s position. There are more than a few economic experts who believe that the underlying economic drivers of inflation are already noticeably slowing – and that too aggressive a rate path will send the economy into recession. The central bank’s inflation analysis does not carry the same credibility that it did a year ago.

With that in mind, Mr. Macklem may need to soften his message. The best communications tool the Bank of Canada may have over the next several months is an open mind.

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