OTTAWA – A senior Bank of Canada official says the central bank isn’t sure when exactly supply-chain issues will work themselves out, which is clouding the outlook of when inflationary pressures should ease.
The central bank in October said it expected that peak to hit before the calendar turned to 2022, before gradually unwinding over the ensuing months.
Deputy governor Toni Gravelle said Thursday that the uncertainty caused by the pandemic and unprecedented economic conditions makes it hard to pinpoint when supply-chain problems will peak.
That raises the risk that inflation stays higher for longer, and Gravelle said is partly why the central bank has kept its key policy rate on hold.
The bank on Wednesday left the rate at 0.25 per cent and reiterated its previous guidance that it didn’t foresee any increases in the trendsetting rate until at least April.
Gravelle said while the bank expects inflation to ease by the second half of next year, monetary policy-makers are watching inflation expectations and labour costs so they don’t cause a spiral of price increases.
“If supply disruptions and related cost pressures persist for longer than expected and strong goods demand continues, this would increase the likelihood of inflation remaining above our control range,” Gravelle said in a virtual speech to the Surrey Board of Trade.
“This could feed into inflation expectations and contribute to wage pressures, leading to a second round of prices increases.”
The annual inflation rate last month hit an 18-year high in October when the consumer price index increased by 4.7 per cent compared with the same month one year earlier.
“We’re very aware of the affordability challenges that people face,” Finance Minister Chrystia Freeland told MPs on the House of Commons finance committee. “It’s something that we take seriously, and it’s something that we’re concerned about.”
The Bank of Canada’s mandate is to keep inflation between one and three per cent, and Prime Minister Justin Trudeau said Wednesday the government would soon renew the bank’s marching orders.
Speaking to a Senate committee Thursday, parliamentary budget officer Yves Giroux said he couldn’t understand why the Liberals have waited this late into the year to renew the bank’s mandate.
“That is saving it for the very last minute, at the time when, presumably, parliamentarians will have taken a holiday break and when there will be fewer people around to address and comment,” Giroux said.
Supply chain issues have helped push up the inflation rate as consumers focused spending on goods instead of high-contact services. Adding to price pressures are increases in shipping costs, delays at ports and challenges for companies to source parts.
As a result, the average inflation rate for goods this year has been 4.4 per cent, compared with 2.1 per cent for services, Gravelle said. In the two decades prior to the pandemic, the rates were 1.4 per cent and 2.4 per cent, respectively.
The bank expects consumers to shift spending toward services, which should ease pressure on goods, and trade bottlenecks to resolve themselves so supply can catch up.
While there are early signs of some easing, such as for semiconductor chips, Gravelle pointed to other problems like flooding in British Columbia that he said will likely worsen backlogs at the Port of Vancouver.
He also noted the Omicron variant of COVID-19, saying consumers could pull back on service spending and put more upward price pressure on goods.
Giroux also said inflation should also cool as the government tapers spending on pandemic aid and the central bank hikes rates.
Economists are expecting multiple rate hikes next year that would have an impact on households with variable rate mortgages. That has raised political concerns about impacts on household finances, as well as higher rates on government debt accumulated through the pandemic.
“Interest rates going up will essentially mean billions and billions more in interest payments that take away the government’s ability to build up our health-care system, help with mental health,” Conservative Leader Erin O’Toole said.
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