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Bank of Canada Governor Tiff Macklem speaks during a news conference in Ottawa, on July 12.DAVE CHAN/AFP/Getty Images

Bank of Canada Governor Tiff Macklem may have been speaking to a Calgary business crowd this week, but his message was directed at the entire country: no one should assume the central bank’s battle with inflation is over yet.

The bank decided to keep its policy rate steady at 5 per cent – prompting a wee bit of relief from mortgage payers. The Canadian economy is showing signs of a cooling down, Mr. Macklem said. Monetary policy is working and inflation has come down significantly from the highs of 2022.

But some of the greatest uncertainties may lie ahead as inflation is both persistent and difficult to predict. Price increases and price variability are still higher than normal. Mr. Macklem doesn’t want to cause any unnecessary pain, but further interest rate hikes are not off the table to get inflation down to the bank’s golden 2-per-cent target.

And he now appears averse to expressing any hints about next moves – there was no talk of a “conditional pause” as there was early this year.

“This time, I think the message is we’re going to be taking it one decision at a time,” Mr. Macklem told reporters on the future of interest rates.

Speaking to a Calgary Chamber of Commerce audience, the first time a Bank of Canada governor has done so since 2007, part of Mr. Macklem’s message was that the city and the province are facing the same inflationary pressures as the rest of the country.

But here’s what many in the Calgary business community pay special attention to, much more than in other parts of Canada, and what they wanted to hear more about: oil prices that are nearing US$90 a barrel once again.

Of course, as a major oil producer, Alberta as a whole benefits with higher prices. But the people, the consumers, are worried about the same costs of living as everyone else. And while the bank of course can’t control the price of oil, decided by global markets, the bank could be accused of giving short shrift to the risk that energy prices could be on a march upwards, as it has done in the past.

Last year, the bank acknowledged it vastly underpredicted Canadian inflation, in large part because it didn’t anticipate volatility in commodity prices – oil being key. As Mr. Macklem pointed out in Calgary on Thursday, energy prices (along with food) are often excluded from the bucket of core inflation measures that the bank watches most closely, because those prices are so volatile.

Volatile they are. But they still can’t be ignored.

Mr. Macklem acknowledged that recently rising oil prices mean gasoline prices will go up, which will push overall, or headline, inflation up in the near-term. But when he speaks about energy price concerns, there seems to be the underlying belief that last year’s high prices are related to one-time events such as COVID-19-induced supply chain problems and the initial shock of the Russian invasion of Ukraine.

“We’ve had a period where demand has rocketed up,” he said.

“Those things have got better,” he continued. “We’d get nervous if that starts to feed through” on measures of core inflation, he added.

But paying attention mostly to core inflation, rather than overall inflation, measures has its limits. Overall inflation still hits people where they live.

And the central bank, and others, need to anticipate an era of more volatile and higher energy prices.

It is true that energy prices have declined since last year, contributing greatly to the slowing of inflation. But working out energy price issues isn’t like working out kinks in the supply chain. There are bigger, longer-term challenges ahead.

The people who follow oil markets have pointed out many times there’s a dearth of supply as the world hurtles toward consuming an all-time record of 102 million barrels of oil a day this year. The traditional idea that greater demand will lead to more supply has been upended. Oil companies are still wary about investing in production for a host of reasons, concern about climate and climate policies being chief among them. Global oil demand is hugely at odds with the world’s environmental goals.

Even if you don’t believe supply is a major concern, Saudi Arabia is showing again and again it’s hell-bent on continued control of the market. This was signalled with Saudi Arabia and Russia announcing this month they would extend voluntary oil cuts to the end of the year, a strategy that could force prices close to US$100 a barrel.

We’re talking about a new geopolitical landscape, one where OPEC+ doesn’t worry much about pain at the pumps for U.S. consumers, and Saudi Arabia can ignore requests from the world’s biggest oil consumer for increased production. The Biden administration also has far less wiggle room in using its emergency oil reserve if prices do spike again. The U.S. withdrew 180 million barrels from the strategic reserve starting in March 2022, bringing the stockpile to its lowest level since the 1980s. It’s since been replenished, but only a wee bit.

We are far from seeing both the end of the effects of Russia’s invasion of Ukraine, or the end of elevated energy prices. There’s a whole host of reasons why energy prices could remain high or go even higher this winter. Canada’s central bank should not repeat its mistakes of the recent past. It needs to make sure it’s forecasting inflation through the lens of the current tough and volatile energy landscape.

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