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The Bank of Canada is going to start moving aggressively against inflation on Wednesday, likely raising its benchmark interest rate by half a percentage point. And it won’t be stopping there. The bank, along with the U.S. Federal Reserve, is almost certainly going to hike several more times this year.

Are these the right moves? Yes. Yes – but with caveats, asterisks and a lot of uncertainty.

On the one hand, there was always going to come a time when the Bank of Canada and the Fed would have to end their superstimulative pandemic monetary policies. That time arrived sooner than expected. The speed of the pandemic downturn set records, but so did the rebound. It caught central bankers off guard.

In the space of less than two years, Canada’s unemployment rate has gone from depression-level highs to a five-decade low of just 5.3 per cent.

However, that very good news has side effects. Canadian inflation hit 5.7 per cent in February, the highest level in three decades. On Tuesday, U.S. inflation for March clocked in at a four-decade high of 8.5 per cent.

Demand – for labour, services and goods – is running very hot. Central banks have to cool it off.

But on the other hand, a lot of today’s inflation isn’t about supercharged demand. It’s about food and energy price hikes caused by war in Ukraine, or supply chain disruptions in locked-down China. These are things the hammer of higher interest rates can’t pound down.

For example, your local car dealer may not have a single new car on the lot – and that issue of lack of supply, owing to production bottlenecks such as a microchip shortage, is not something amenable to resolution by higher interest rates.

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Higher interest rates won’t cause Ukrainian fields left fallow by war to be planted, or reopen Black Sea ports closed by Russian attacks. They won’t cause more cars and trucks to be manufactured.

But on the other, other hand, there are signs that some inflation may be starting to moderate. For example, though the U.S. consumer price index is up 8.5 per cent over the past 12 months, a lot of that was driven by gasoline – up 48 per cent year-over-year – and used cars, up 35 per cent.

Core U.S. inflation, which strips out volatile energy and food, was up by “only” 6.5 per cent over the past year. And core inflation decelerated in March, rising just 0.3 per cent from the previous month.

Central bankers have to be very careful that they aim at the right target, and don’t deliver so much demand destruction that we end up in a recession.

Mentioning a recession at this moment may sound like fretting about frostbite during a heatwave. But earlier this month, a Wall Street Journal survey of 65 leading economists gave better than one-in-four odds of a downturn next year.

Crazy talk? In normal times, yes. But economic heatstroke and hypothermia can, in rare instances, cohabitate. They did in the 1970s, during a period of spiking energy prices known as stagflation.

The type of inflation that central banks are most prepared to fight has a classic and simple cause: too much demand. Too much demand sparks higher prices, which leads to a spiral of wages chasing prices, driving both higher. Solution: tighter monetary policy.

Canada’s current inflation situation partly, perhaps even mostly, fits the too-much-demand story. But it also partly doesn’t fit. In addition to inflation driven by issues of constrained supply beyond our borders, Canada has yet to see much of a spike in wages.

But on the other, other, other hand, rising interest rates take months to have an effect. The central bank can’t wait for a wage-price spiral to get entrenched before acting, or they’ll be behind the curve. Like a batter facing a fastball, you have to start swinging before the ball crosses the plate. Wait, and it’s too late.

That’s why, right now, the Bank of Canada has to roll out higher interest rates. It had to happen eventually, and eventually is already overdue.

But the bank has to carefully disaggregate the causes of rising prices, and only aim at the ones it’s equipped to hit. High interest rates will cool an overheating economy; they can’t grow more wheat, or pump more oil, or unblock a supply chain.

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