Bank of Canada Governor Tiff Macklem said while global factors were initially responsible for higher prices in Canada, inflation increasingly reflects what's going on inside the country..“Some of this inflation reflects global developments that we don’t control, but inflation in Canada increasingly reflects what’s happening in Canada,” Macklem said Thursday..“The demand for goods and services here at home is running ahead of the economy’s ability to supply them.”.During a speech to the Halifax Chamber of Commerce, Macklem said inflation in Canada peaked at 8.1% in June, and has declined in the last two months, which he called "welcome news."."But inflation is not going to fade away by itself," Macklem said. "To get it back to more normal levels, we need to slow spending in the economy so supply can catch up with demand. This will help relieve price pressures in Canada.".During the early days of the COVID-19 pandemic, prolonged deflation and an economic depression were a big concern, according to Macklem. He said the Bank of Canada responded with "exceptional monetary policy support" to help strengthen the economy. .Conservative leader Pierre Poilievre has been critical of the Bank's quantitative easing, or "money-printing" policy of 2020, which he claims led to higher inflation in Canada. The Bank of Canada repeatedly denied its monetary policy was responsible for inflation.."It worked," declared Macklem. "We avoided deflation and the deepest recession on record was followed by the fastest recovery ever.".But Macklem said households in Canada shifted their spending from in-person services to durable goods, which strained already damaged supply chains. He claimed this resulted in higher prices for many internationally traded goods, especially as global energy prices spiked in 2021.."At the time, we assessed the effect of these global forces on inflation was likely to be transitory," Macklem said. "In hindsight, that turned out to be overly optimistic.".The war in Ukraine in 2022 drove up the price of oil and agricultural commodities and created new disruptions to global supply chains, according to Mackem..Macklem said, thankfully, food inflation has begun to ease, shipping bottlenecks are improving, and shipping costs have come down from their "exceptional highs." But he warned the recent depreciation of the Canadian dollar to the US dollar will "offset some of the global improvements by making US goods and vacations more expensive for Canadians."."There's also considerable uncertainty about the evolution of global supply chains and commodity prices. The global economy remains highly disrupted by the effects of the pandemic and the war in Ukraine. Predicting international price movements isn't easy, and the global inflation picture could change quickly. Unfortunately, we don't have much influence over that," Macklem said..Macklem said the Bank of Canada will need to continue increasing interest rates to drive down inflation and excess demand. On October 26, the Bank will impose another increase in its 3.25% prime rate, its sixth hike this year..While forward looking indicators show the economy is slowing, Macklem said labour markets remain tight, the economy is in excess demand, and they have "yet to see clear evidence that underlying inflation has come down when combined with still elevated near term inflation expectations.."The clear implication is the further interest rate increases are warranted. Simply put, there's more to be done," he said.
