A rounding error, or 0.15%.That’s how much of an effect the Liberal carbon tax has on inflation, according Bank of Canada Governor Tiff Macklem. And that’s just the primary price of the fuel itself, not all the other ancillary inputs from agriculture, transportation or manufacturing..Macklem was in Calgary on Thursday to provide his regular economic update after the bank decided to hold the line on interest rates by keeping them at 5%..Although he acknowledged there would be some unspecified secondary impacts from the carbon tax — the accountants at the central bank don’t exactly know what they are — Macklem said he’s confident the broader economy would be able to absorb those extra costs over time..“As I said, our estimate is that that increases inflation each year by 0.15%,” he said in response to a question from The Western Standard. “So inflation is measured over 12 months. So it's each year. It's point one-five, but that's a relatively small impact on yearly inflation.”.In May of 2022, when the carbon tax was only $50 per tonne, Macklem told the House Finance committee the overall impacts on ‘realized’ inflation — which strips out volatile energy and food prices — would amount to about 0.4%..Those numbers also don’t include the impacts of the clean fuel tax — ‘Carbon Tax 2.0’ — that were introduced in July and are in addition to the primary tax which will triple from $65 per tonne of CO2 to $170 by 2035. . InflationInflation is down but still above the Bank of Canada’s 2% target. .Macklem said the fact it is going to be increased at regular intervals will make it easier to factor those additional costs over time because the main aim of bank policy is “price stability.” In other words, it’s ‘baked’ into inflation expectations..“It's a good question,” he told The Western Standard. “And we can take this offline if you want. But yes, that is the direct impact on the components that are most directly affected. It does not include second round effects.”.It’s also despite the fact higher energy costs due to rising oil prices is one factor that will keep the economy from reaching the bank’s 2% inflation target until at least 2025. .That’s the main factor that will keep the bank’s headline inflation number — which includes volatile food and energy prices — near 3% over the intermediate term. That in turn will keep interest rates at 5% or even higher for at least the next year..Ironically, it was the drop in energy prices over the last year that helped lower inflation from 8% in July of 2022 to 3.3% this summer..“This is welcome progress, but we know that many prices — those for food, shelter and many services — are not cooling in the same way. And recently global oil prices have risen again, pushing gasoline prices up,” he said in his prepared remarks..That squares with a July study from economic think CESifo that said the expectation of higher prices from carbon trading in France had a bigger contribution to higher prices — although they did — than the actual carbon taxes themselves, and lasted longer..“Therefore, policymakers and central bankers should carefully consider the optimal policy mix to advance the green transition without inhibiting the monetary authorities’ ability to stabilize prices,” it said..And indeed, price stability is Macklem’s main concern, over and above any effects from taxation — all of it — than any one tax itself. The same applies for government spending, he said..“Price stability means households and businesses can plan and invest with confidence that their money will hold its value,” he said..“We know higher interest rates are hitting some Canadians hard, and we don’t want this to be any harder than necessary. But letting too-high inflation persist would be worse. We are confident that 2% is the right target. The target is now in sight. We need to stay the course.”
