Inflation has come down a bit in Canada, but it’s still way too high. After rising rapidly to peak at 8.1% in June, inflation measured by the consumer price index (CPI) was 7.6% in July.
Posted at 9:00 a.m.
The good news is that it looks like inflation has already peaked. Gasoline prices, responsible for about a fifth of overall inflation in recent months, have gone from an average of $2.07 per liter in June to $1.88 in July, and we know that pump prices continued to decline in August. Prices for some key agricultural commodities, such as wheat, have also fallen, as have global shipping costs, which were particularly high until recently. If the trend continues, inflation will continue to decline.
The bad news is that inflation will probably remain too high for some time to come. Many of the global factors that have pushed up inflation will not go away overnight.
Indeed, supply chain disruptions continue, geopolitical tensions are high and commodity prices remain volatile. And here at home, the economy has been overheating for some time. Now that Canadians can finally take advantage of the full reopening of the economy, there are not enough goods and services to meet demand. Businesses struggle to keep up, and that leads to delays and higher prices. The result is widespread inflation. Even though inflation slowed slightly in July, more than half of the goods and services that make up the CPI show an increase of more than 5%.
As a central bank, it’s our job to control inflation, and that means we have to calm things down. That’s why we’ve been raising interest rates since March. In July, we took the unusual step of increasing our key rate by one percentage point, bringing it to 2.5%. Raising our key interest rate increases borrowing costs in all sectors of our economy, whether for personal loans, car loans or mortgages. And, when borrowing costs rise, consumers tend to borrow and spend less – and save more. We need to moderate spending to allow supply to catch up with demand, which will curb inflation.
The housing market is a good example to illustrate the situation. Rising mortgage costs quickly cooled activity in the housing market from the unsustainable growth seen during the pandemic, and house prices began to decline. When activity in the housing market slows, spending on related goods and services, such as renovations, appliances and furniture, tends to slow as well.
To control inflation, we need to better balance aggregate supply and demand in the economy. Our goal is to rein in the economy enough to bring inflation back to the 2% target.
We don’t want to stifle demand, rather we want to slow its growth. This is what we call a soft landing. By raising interest rates aggressively now, we are trying to avoid even higher increases and an even greater slowdown in growth in the future.
I know some Canadians are wondering why we are raising borrowing costs when everything is already too expensive.
We know that higher interest rates will add to the hardship caused by high inflation that many Canadians are already experiencing. However, it is by raising borrowing costs in the short term that we can lower inflation in the long term, which will ultimately be better for everyone. High inflation puts us all in the way. It erodes our purchasing power and complicates our spending and saving decisions. It seems unfair, and it hurts confidence in our economy.
The best way to protect yourself from excessive inflation is to eliminate it. This is our job, and we are determined to do it. Tuesday’s numbers are encouraging, but it will still take some time before inflation returns to normal. We know we still have work to do. We won’t give up until we get inflation back to the 2% target.