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Governor of the Bank of Canada Tiff Macklem during a videoconference event with the Council on Foreign Relations at the Bank of Canada in Ottawa on Oct. 7.Justin Tang/The Canadian Press

The Bank of Canada faces an inflation headache that is getting too big to shrug off. It has an important opportunity this week to address it in a meaningful way – with an adjustment in its message, even if it remains a long way from adjusting interest rates.

The central bank announces its latest interest rate decision Wednesday, just a week after Statistics Canada reported that the inflation rate hit an 18-year high of 4.4 per cent in September. Inflation is the economic story of the moment. Everyone wants to know when and how the Bank of Canada – whose sworn objective is to maintain “low, stable and predictable” inflation, formally defined by its 2-per-cent target – intends to address it.

The bank will almost certainly make one important policy change on Wednesday: scaling back its government bond-buying program to what it has dubbed the “reinvestment phase,” in which it will only buy enough supply to replace existing holdings as they reach maturity. That will effectively end the bank’s provision of monetary stimulus through quantitative easing, or QE. It’s a big deal. It has also become a side show to the inflation question.

The bank’s quarterly Monetary Policy Report, to be published in conjunction with Wednesday’s rate announcement, will certainly contain a considerable increase in the bank’s inflation forecast. Bank of Canada Governor Tiff Macklem recently acknowledged that “higher inflation could be a little more persistent” than the bank had previously thought.

The Bank of Canada’s principal tool for fighting inflation is its key policy interest rate. Yet there is, frankly, zero chance that the bank will raise its key rate this week. The bank promised 15 months ago that it wouldn’t increase the rate from its record low 0.25 per cent “until economic slack is absorbed,” and it has repeated that pledge at every rate setting since, even in the face of rising inflation over the past six months.

The bank considers most, if not all, of this inflation surge to stem from temporary, pandemic-related factors. It’s willing to tolerate inflation running hot for a while without raising interest rates, rather than apply the brakes on the economic recovery before it’s completed.

But there’s tolerance and then there’s indulgence. Inflation has already spent half a year well above the top of the bank’s 1-to-3-per-cent band, which is supposed to delineate the bank’s normal range of flexibility. Two of the bank’s three preferred measures for core inflation – designed to weed out temporary price swings of a narrow range of goods and drill down to the broader underlying trend – are far above the 2-per-cent sweet spot, and still climbing.

There is a legitimate concern about how long the central bank can dismiss this rise in inflation, without eroding confidence in the bank’s commitment to its inflation target.

There’s also the possibility that the bank may actually be wrong.

Yes, this inflation spike is happening while the economy still appears to have plenty of spare capacity – which is to say, the fundamental forces that usually bring on sustained inflation in a normal economic cycles don’t seem to be present.

But given the bizarre nature of the COVID-19 shutdowns, reopenings, layoffs, rehirings and stew of continuing partial restrictions, no one can say with any confidence what the economy’s current capacity really is. Some economists argue, for instance, that the labour shortages reported by businesses are evidence that the economy is much closer to full speed than the Bank of Canada believes.

“We think there’s good reasons to believe that these are one-off price increases, they won’t create ongoing inflation,” Mr. Macklem said in a recent press briefing. “But if that’s not the case, it is our job to take action and bring inflation back to target. And we’ll do that.”

That’s a message that the bank needs to underline in Wednesday’s rate-decision statement. It may be time for the bank to outline the conditions that would open the door for inflation-driven rate hikes.

At very least, this would entail an added emphasis in Wednesday’s statement on two key factors: wages and inflation expectations. Both are critical to assessing if and when a temporary inflation surge tips over into a problem that the bank can no longer ignore.

So far, neither has reached such a tipping point. But they’re getting closer.

Mr. Macklem said in a recent media briefing that wage growth “is in line with productivity growth” – indicating that wages “are not providing and independent source of inflation.” Nevertheless, Bank of Nova Scotia economist Derek Holt recently noted, month-to-month growth in average hourly wages averaged a torrid 7 per cent from July to September – an acceleration that is “impossible to simply ignore,” he argued.

Meanwhile, the Bank of Canada’s own quarterly consumer survey, released last week, showed that longer-term inflation expectations haven’t been shaken yet. But expectations for the next 12 months have soared, and two-year expectations have begun to creep higher.

It wouldn’t take a lot in the bank’s rate-decision statement for it to signal that these two factors are pivotal to the timing of rate increases over the next year. One well-placed sentence on Wednesday would be a big leap in advancing the inflation discussion, from, “Oh, it’s just temporary,” to a clearer policy direction.

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