The Bank of Canada’s inflation forecast
The rise in inflation anticipated by the Bank will be “transitory,” but it won’t be painless or short-lived
By Rob Roach, ATB Economics 18 November 2021 1 min read
Yesterday’s Owl reported that the national inflation rate hit 4.7% in October—the highest it’s been in over 18 years.
Inflation has positive and negative effects, but there is a good argument to be made that, in the words of the Bank of Canada, “low, stable and predictable inflation is good for the economy.”
Fallout from the pandemic, government stimuli, clogged supply chains, drought and high energy prices have created a situation in which inflation is high (relative to the Bank of Canada’s target rate of 2%), unstable and unpredictable.
The big question is: how long will it last? The unpredictable element noted above makes it difficult to say with different pundits providing conflicting answers.
Whether you agree or disagree with the Bank of Canada’s answer, it’s worth noting because the Bank deploys a lot of brainpower to this topic.
According to the most recent Monetary Policy Report, the Bank expects inflation “to remain elevated [around October’s rate of 4.7%] for the rest of 2021 and into 2022 due to ongoing supply disruptions created by the pandemic and higher energy prices.”
“Inflation is [then] expected to ease to about 2% by the end of 2022 as these pressures dissipate.”
In annual terms, the national inflation rate is forecast to average 3.4% in 2021, 3.4% in 2022 and 2.3% in 2023.
It’s important to keep in mind here that the price growth in 2022 and 2023 is on top of the high rates that precede it whereas the price growth in 2021 is relative to an inflation rate of just 0.7% in 2020. As a result, prices in 2022 and 2023 will be a lot higher than before COVID even as the monthly rate heads back down toward the 2% target.
As such, the rise in inflation anticipated by the Bank will be “transitory,” but it won’t be painless or short-lived.
Answer to the previous trivia question: The last time the annual inflation rate in the United States was above 10% was in 1981 when it averaged 10.3%.
Today’s trivia question: What is hyperinflation?