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Remember back in those innocent days of 2021, when central bankers told us that inflation was “transitory,” and we believed them?

And then those dark times of 2022, when central bankers abandoned “transitory,” and we mocked and castigated them for being incompetent, or dishonest, or both?

Well, “transitory” is staging a quiet comeback that could get louder over the next several months. It will serve as a very useful concept as we watch inflation unravel. But just as it proved a deeply unsatisfactory explanation when inflation was on the way up, it won’t prove adequate to overcome the more stubborn aspects of price pressures as they return to earth.

Statistics Canada’s December consumer price index (CPI) report this week bore the stamp of transitory factors that, central bankers had once assured us, were built into the acceleration of prices that began nearly two years ago. Only now, they mark the downside of the slope.

The decline in the inflation rate, to 6.3 per cent from 6.8 per cent, was led by a sharp retreat of gasoline prices, whose upward surges were a central component of inflation’s dramatic climb. The numbers also featured outright price declines in numerous durable consumer goods – furniture, appliances, household electronics – that had experienced price spikes in the aftermath of the COVID-19 pandemic, amid interruptions and severe bottlenecks in the global movement of components and finished products. Statscan itself credited the lower prices to “easing supply chain pressures and lower shipping costs.”

In short, the price pressures that central bankers had insisted were transitory – temporary in nature, unsustainable – are, indeed, in the predicted retreat.

“Those who labelled the inflation upsurge of 2021 and early 2022 as ‘transitory’ ended up with egg on their faces. But the CPI’s behaviour in recent months suggests that at least some of what we’ve gone through on the inflation front was indeed befitting of that label, if we waited long enough,” Canadian Imperial Bank of Commerce chief economist Avery Shenfeld said in a research note.

And what we’ve seen so far is barely the tip of the iceberg. There’s a lot more of those transitory forces still to work their way out of the year-over-year inflation rate over the next several months.

We haven’t even begun to measure energy prices against their stratospheric peaks of last spring, following Russia’s invasion of Ukraine. In the December inflation report, the gasoline component was actually up slightly from a year earlier, but if you were to measure it against last March, it was down nearly 20 per cent. Compared with last June? Down 30 per cent. In a few months, those year-earlier comparables will provide a serious downdraft to the inflation rate.

Likewise, prices for furniture, appliances, home entertainment equipment, clothing, and sports and recreation equipment are either flat or down from the middle of last year.

In fact, on a non-seasonally adjusted basis, the consumer price index is flat over the past six months. Flat.

As the year progresses and the current more moderate pace of price growth is measured against the extremes of last year – extremes that are now proving unsustainable – we’re going to see a rapid retreat in the 12-month inflation rate. It wouldn’t be a stretch to see the year-over-year rate below 3 per cent by the middle of the year.

So, maybe those central bankers hadn’t been so wrong after all. But they hadn’t been entirely right, either.

Central bankers abandoned the “transitory” argument in their public discourse when it became clear that the price increases not only had more staying power than the word seemed to imply to the general public, but also had built up more momentum behind them than transitory factors could fully explain.

By the same token, the fading of these transitory factors in the coming months aren’t going to bring inflation back to the Bank of Canada’s 2-per-cent target all on its own. Other elements are still at play. Even once the transitory surge fully subsides, these elements pose a risk of stubbornly elevated inflation – albeit nothing close to where we have seen inflation in the past year.

Recent trends in the economic data certainly suggest that the sharp interest-rate increases over the past few months will succeed in cooling excess demand in the economy, the key force pushing inflation beyond transitory factors. But nearly two years of high inflation – indeed, the highest many Canadians have experienced in their lifetimes – we face after-effects that look likely to linger well beyond the economic slowdown that central banks in Canada and elsewhere have engineered.

The Bank of Canada’s quarterly business and consumer surveys, released this week, show that inflation expectations for the next couple of years remain well above the levels that prevailed before the 2021-22 inflation surge. Businesses still expect higher-than-usual wage demands from workers, whose incomes have fallen in real terms during the inflation surge and will want to catch up. Those factors may build a pretty firm floor under just how low inflation will drift in the next year or so.

It could mean that while getting the inflation rate from 7 per cent to 3 per cent will come remarkably quickly, hammering it down from 3 per cent to the Bank of Canada’s target of 2 per cent may prove stubborn. That last percentage point will be the toughest hurdle the central bank faces.

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