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A person shops for milk at a grocery store in Toronto, on Dec. 8, 2021. Statistics Canada said Wednesday the annual inflation rate rose to 5.1 per cent in January, its biggest jump in more than 30 years.Christopher Katsarov/The Globe and Mail

As we watch the rising waters of inflation reach another new height, it’s important to take a breath and remember that it took us two very strange years to get to this state. It’s going to take us a while to get out of it. There are no quick fixes.

Not exactly consoling as we gaze at Wednesday morning’s report from Statistics Canada that inflation jumped to 5.1 per cent in January. That’s a 30-year high, and higher than economists had expected.

But even more alarming than inflation’s height was its widening breadth. This no longer looks like a problem that can be attributed to a handful of goods – such as gasoline, food and housing – as was the case a few months ago. Prices for every major category in the consumer price index increased in January, both on a month-over-month and a year-over-year basis.

The Bank of Canada’s three preferred measures of core inflation – designed to look through temporary spikes and distortions to give a picture of broader inflation pressures throughout the economy – averaged 3.2 per cent, exceeding the bank’s inflation target range of 1 per cent to 3 per cent for the first time. One of those measures, known as CPI-common – considered the best indicator of the three of the economy nearing full capacity – hit a 12-year high of 2.3 per cent.

Perhaps the good news is that this leaves no doubt that the bank was right when it declared in late January that Canada’s output gap has closed – an event that delivers inflation quite divorced from any temporary factors that might have been behind increases earlier in the economy’s recovery. This is about as bright a green light as this central bank will ever get to start raising interest rates at its next decision date two weeks from now.

The Bank of Canada has said throughout the COVID-19 pandemic it would wait to raise rates until it was sure the economy was back to full speed. This is now sure. Arguably, it’s a month or two beyond sure. But this is the consequence of committing to wait until you see the whites of the recovery’s eyes.

There is now a question of whether the central bank needs to act more aggressively to ratchet up rates and put a chill on price pressures. It still looks unlikely the bank will increase its key rate in anything more than the usual quarter-percentage-point increments, although the possibility of a half-point hike in the early stages has begun to creep into financial markets.

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The markets have now priced in hikes at every rate decision between now and September – which would return the bank’s key rate to its prepandemic level of 1.75 per cent from its current record low of 0.25 per cent.

That’s a pretty high-speed rate tightening by historical standards, and we’d certainly expect it to have a serious chilling effect on inflation – eventually. But interest rate changes take roughly 18 to 24 months to fully work their way through the economy. The first few months of rate hikes would likely only have a modest impact. However, that impact might be felt most quickly and acutely in the housing market, which has been a major driver of Canadian inflation.

Still, we shouldn’t underestimate the important psychological signal of swift rate action. The biggest risk, as long as inflation is this elevated, is that consumers and businesses start believing that higher inflation is here to stay, resulting in a more entrenched upward drift in expectations. A high-speed tightening would return the conversation to the bank’s commitment to reining in inflation, which in itself would aid the inflation fight.

The federal Conservative Opposition leapt on the inflation report Wednesday to argue, in part, that COVID-19-related restrictions are part of the inflation problem. Political considerations aside, they’re not wrong. While, obviously, public-health concerns must take precedent, a winding down of those restrictions will ease supply pressures and open up more avenues for consumer demand in the services sector, taking the price squeeze off a lot of goods. Given the momentum among several provinces to reduce and remove restrictions, and even federal moves to reduce requirements for international travel, the easing of these pressures could be surprisingly swift.

And we can still count on getting some relief as the year progresses from more favourable base effects. Unlike over the past year, when the standard year-over-year inflation measure compared rising prices against the relatively weak prices that prevailed in 2020, we’ll soon be basing the calculation on the much stronger and fast-rising prices of 2021. But with substantial price increases still happening – the inflation rate over the past three months is about 4 per cent annualized – it’s clear that a reversal of base effects is not going to let us off the hook.

Nor should it, frankly. As Bank of Nova Scotia economist Derek Holt said in a research note Wednesday, any decline in the inflation rate stemming from changing base effects would mask the more meaningful state of near-term price pressures – running the risk that the central bank could get “head-faked” by the initial weakening of inflation in the coming months.

Central bankers attempted to look through base effects in analyzing inflationary pressures as inflation built over the past year. They’ll have to be just as committed to doing the same as they focus on bringing inflation back under control.

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