High inflation could be ‘a little more persistent’ than expected, BoC’s Macklem says

Bank of Canada governor Tiff Macklem says high inflation could be “a little more persistent” than the central bank previously thought, while the economic recovery could take longer than expected.

In his first news conference since July, Mr. Macklem said the current spike in inflation is largely the result of temporary factors, such as supply chain disruptions and year-over-year price comparisons. But he acknowledged that these factors are proving to be more complicated and longer-lasting than forecast.

Inflation has run above the top of the bank’s target range of 1 to 3 per cent since May, hitting an 18-year high of 4.1 per cent in August. Meanwhile, the Canadian economy suffered an unexpected contraction in the second quarter, and fell 0.1 per cent in July.

“This pandemic keeps throwing new curveballs,” Mr. Macklem told reporters after a virtual address to the Washington-based Council on Foreign Relations on Thursday.

“Working through some of those issues is likely to take a little longer than we expected. That’s showing up in inflation. Higher inflation could be a little more persistent. It’s showing up in GDP, and that recovery could take a little longer,” he said.

During his speech, he highlighted the importance to the global economic recovery of widespread vaccination against COVID-19 in Canada and other countries. He called the development of the vaccines an example of international co-operation at its best.

“Tragically, there hasn’t been nearly as much success in ensuring the equitable global distribution of vaccines, especially to developing countries,” he added. “This is the biggest health and economic risk facing the world, and – as the G20 highlighted in July – governments and the private sector must work together to make vaccines available to all.”

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The pace of vaccination around the world ties into the issue of supply chain disruption, which in turn puts pressure on the Canadian economy. Factory closings in Asia, container-ship traffic jams, and a global shortage of computer chips have slowed economic activity in Canada while driving up prices.

“Households are either delaying purchases because things like cars are more expensive now, or they simply can’t get certain things. Shipping delays are making it harder to buy certain things. So that is delaying some spending, and it’s also deferring some investment,” Mr. Macklem said.

Around the world, economists are debating whether the run-up in consumer prices is transitory or the beginning of an extended period of high inflation.

Mr. Macklem came down solidly on the transitory side. He said the bank is watching a number of indicators to see if one-time price jumps turn into more persistent inflation. Short-run inflation expectations have moved up, but medium and long-term expectations remain well anchored, he said. And there are few signs that wages are running ahead of productivity growth and becoming an independent driver of inflation, he said.

“Macklem’s steadfast view that this period of high inflation is transitory is consistent with our view that the Bank of Canada will keep rates on hold until late next year,” Canadian Imperial Bank of Commerce senior economist Royce Mendes wrote in a note to clients.

The central bank has promised not to raise its policy interest rate until Canada’s economic output is back to its potential, although it has significantly reduced the economic stimulus it is providing through its quantitative easing (QE) program.

It is now buying $2-billion worth of government bonds a week, down from $5-billion at the start of the pandemic. Analysts widely expect it to cut its purchases again at the Oct. 27 rate announcement – which would mark the beginning of the “reinvestment phase,” where it stops adding additional stimulus through QE.

When it comes to the job market, Mr. Macklem noted that hiring improved over the summer, particularly for industries such as restaurants and travel. But the situation remains unbalanced, with companies struggling to attract workers even as unemployment is high.

“We are seeing that this process of workers finding jobs and companies finding workers … could move a little more slowly than we expected. But the fact that we continue to see large numbers of vacancies and we still have unemployment over 7 per cent means there is room for that to happen. The demand is there, so we do expect that to play out,” he said.

Mr. Macklem noted that the housing market is slowing as the economy reopens and demand eases for more space to live and work. “You can now go to a restaurant. You don’t have to eat everything in your own kitchen,” he said. “You’re starting to see some normalization.”

Although home resale activity slowed over the summer, residential property prices have continued to climb. Canada Mortgage and Housing Corp. has warned that the real estate market is highly vulnerable to a price correction.

Mr. Macklem said in his speech that the international financial system needs to evolve to manage the challenges of the pandemic recovery, climate change and digital currencies. He also advocated for open capital markets and a more active effort from advanced economies to integrate emerging market economies into the global system.

Different countries are starting to recover from the economic and health effects of the pandemic at different speeds. This disparity is fuelling concerns that financial tightening in places such as the United States could disrupt emerging market economies that have weak growth and low vaccination rates.

With a report from Rachelle Younglai

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