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Bank of Canada Governor Tiff Macklem has said the bank is willing to let inflation run temporarily above the 2-per-cent target, while leaving the monetary policy taps open, to help endure a more complete and sustained recovery.

Tijana Martin/The Canadian Press

Here’s a highly unscientific experiment to test how loud the inflation noise has become.

Number of e-mails in my inbox from last week that contain the word “inflation”: 110

Number of e-mails in my inbox from last week that contain the word “COVID”: 99

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Granted, the clutter of an economics journalist’s inbox skews toward certain content. Nevertheless, the point is that among economists, think tanks, market strategists and various others who want to get the attention of an economics journalist, inflation has become the dominant preoccupation. Last week’s major economic news – Canada’s latest monthly report on the consumer price index, or CPI; the U.S. Federal Reserve’s interest rate decision – helped crank the volume to a new level.

But you know what isn’t on a new level, when you take a close look at where we are today versus where we were before the pandemic threw everything and everyone for a loop?

Inflation. The actual trend of the prices of all the stuff that Canadian consumers buy.

As the debate rages over how much of Canada’s 3.6-per-cent annual inflation in May is or is not the result of “base effects” (i.e. that the “base” of the comparison from a year ago was a period of unusually depressed prices in the early days of the pandemic), it’s useful to move away from the standard year-over-year comparison to look at what consumer prices had been doing before all this mess began. Not just where CPI stood in February, 2020, but the trajectory on which it had been before COVID-19 upended the apple cart. Then, trace a line to where that trajectory would have taken CPI if it had stayed on its prepandemic course.

University of Calgary economist Trevor Tombe did just that in a tweet last Wednesday, a few hours after Statistics Canada’s May CPI report delivered the highest year-over-year inflation rate in a decade. He showed that for all the concern over the surge in prices this spring, all they have achieved is to lift CPI back up to roughly the trend line it had been on early last year, before COVID-19′s massive first-wave lockdowns stopped consumer demand cold and sent CPI swooning.

All we have achieved with this little inflation flurry is to bring CPI back on course. That it has happened quickly as the ramp-up of vaccinations changed the economic equation shouldn’t be terribly shocking, given the abruptness of the price declines when COVID-19 first arrived 15 months ago. This is what the flip side looks like.

When you dissect the May CPI report, measuring the data against the prepandemic figures of February, 2020, it’s hard to see what all the inflation fuss is. The total CPI increase in that 15-month interval, on a seasonally adjusted basis, is 2.2 per cent – which works out to an annualized pace of just 1.8 per cent. The Bank of Canada’s old core measure of inflation, which excludes the eight most volatile components of CPI, is 2 per cent annualized.

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Those are decidedly ordinary numbers, and remarkably in line with the Bank of Canada’s 2-per-cent inflation target – which is also pretty much Canada’s long-term inflation rate. A return to the trend line, after the dizzying ups and downs of the past 15 months, doesn’t look like the worst thing for any level-headed central banker to have on their hands.

Indeed, many monetary policy theorists believe that this should be exactly how central banks should approach inflation – with a goal to restore prices to the trend line after a major economic shock. It’s what’s known as price-level targeting; while it’s not the Bank of Canada’s approach, it is one of the alternatives that the bank is considering in the current review of its policy framework, ahead of this fall’s five-year renewal of the central bank’s inflation-targeting agreement with the federal government.

Bank of Canada Governor Tiff Macklem has said the bank is willing to let inflation run temporarily above the 2-per-cent target, while leaving the monetary policy taps open, to help endure a more complete and sustained recovery. Though it’s not quite a de facto commitment to price-level targeting, it’s awfully close; the bank is taking advantage of what it calls its “flexible inflation target” in a way that allows the economy, and prices, to play catch-up for what they lost in the crisis.

But we’ve now caught up, at least in terms of the price trend. What now? The argument for keeping the monetary-policy gas pedal to the floor becomes a more complicated one once the CPI path has been restored. The policy goal can no longer be reflation; we’re already reflated. Now, policy has to start to pivot toward stability on this restored inflation path.

That’s going to require some reworking of the message coming from the Bank of Canada in the near term, almost certainly backed by carefully measured unwinding of monetary stimulus in the months to come. For all the noise, inflation isn’t a problem today. But it could still become one, without a clearly annunciated recognition from central bankers that we have entered a new phase.

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