Bank of Canada Governor Macklem says inflation still high

The governor said that demand is out of supply more broadly in the Canadian economy because of global events such as the Russian invasion of Ukraine and the Pandemic. Macklem said in hindsight, the bank's early assessment that high inflation was temporary was overly optimistic. As the economy opened in spring, pent-up demand for services in sectors like travel and recreation went up, leading to inflation becoming even higher, he said. Macklem said that Canadians had first-hand experiences of these pressures when they tried to book a campsite or reserve a table at their favourite restaurant.

The pace of price increases in Canada has slowed due to lower gas prices after inflation reached an annual rate of 8.1 per cent in June. In August, the annual inflation rate was seven per cent. Macklem said that the core measures of inflation have yet to decline meaningfully, even though headline inflation has come down. The Governor said that the core measures of inflation, which tend to be less volatile than the overall inflation rate, will be closely watched by the Bank of Canada as it monitors inflation and the effects of higher interest rates. Macklem said there are signs that global inflationary forces are easing and that food inflation should soon begin to come down. He said that these developments are not enough to bring inflation down despite commodity prices falling and global supply chains easing.

Macklem said further interest rate hikes will be necessary because of the tight labour markets, economy still in excess demand and inflation still too high. The central bank has been monitoring inflation expectations among people and businesses over fears that inflation could become more severe. The high inflation expectations can lead to businesses setting future prices even higher and workers demanding higher wages in future wage contracts. Macklem said that in order to keep inflation expectations in control, Canadians will need to see inflation come down. There is more to be done, he said.

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