Concerns Growing About Inflation In Canada

Canada’s Central Bank is holding its principal interest rate at 2.25%, for now.  Holding the current rate was widely expected, but Bank of Canada Governor Tiff Macklem is warning that rising global energy prices caused by the Iranian conflict are almost certainly going to push inflation higher for many countries, including Canada.

Macklem explained that Canada’s inflation rate has remained on target at about two percent over the past year. But he expects to see higher inflation numbers in the next few months due to recent events impacting Canada.

“Inflation in Canada has been close to the two percent target for more than a year now," Macklem said.  "Economic weakness, combined with rising inflation, is a dilemma for central bankers. Increasing interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target. Canada’s economy is dealing with a lot. And we now face more volatility.”

While explaining the balancing act central bankers perform with interest rates, Macklem went on to say that the Canadian economy is facing increased levels of uncertainty, with a changing international trade profile, a USMCA agreement that is very much up in the air, and the recent effect of the U.S.-Israeli war with Iran.

“The war in Iran has added a new layer of uncertainty. Its impact on the global and Canadian economies will depend on how long the conflict lasts and the extent to which it spreads across the Middle East," he said.  "Canada’s outlook is further complicated by structural change. Shifting trade relationships, and the review of the Canada-United States-Mexico agreement is still a big unknown. Uncertainty is acute.”

Canada’s central banker expects higher inflation from higher oil prices.  And this will squeeze consumers, leaving them with less income for other spending. Food prices are still too high, according to Macklem, with a lot of Canada’s fresh produce imported. And while higher energy prices are good news for Canada’s industrial oil and gas sectors, those same higher costs will translate to less consumer spending.

“If higher oil prices are maintained, this will boost incomes from our energy exports," Macklem said.  "At the same time, higher oil prices squeeze consumers, leaving them with less income for everything else. Food inflation remains a problem. The recent sharp increase in global energy prices is causing higher prices at the pump, and this will push inflation up in the coming months.”

Yet despite the warnings, Macklem left on a fairly upbeat note, saying, “Relative to some other countries, we are in a pretty good position.” The Bank of Canada will make its next interest rate decision on April 29.

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