'Our job is not done yet': Tiff Macklem says Bank of Canada has more to do to tame inflation

The governor of the Bank of Canada stopped short of declaring victory in his year-long struggle with elevated cost pressures despite evidence that inflation slowed in July.

Macklem was reacting to the latest release of Statistics Canada's consumer price index, which increased 7.6 per cent in July from a year earlier, compared with 8.1 per cent the previous month, representing the first year-over-year decrease since June 2020.

Lower gasoline prices have a large influence on the headline number. More than 60 per cent of the items in Statistics Canada's price basket posted annual increases of more than three per cent.

The Bank of Canada has three "core" measures of inflation that attempt to smooth the influence of volatile prices such as oil. The average of the three went up to a record 5.1 per cent, which was well outside the central bank's comfort zone.

Macklem wrote in an opinion piece for the National Post that it would take some time before inflation was back to normal. It won't be done until inflation returns to the two-per-cent target.

The central bank hiked the benchmark rate to 2.5 per cent from 0.25 per cent in four increases, including a dramatic one percentage-point hike in July.

Bay Street economists were surprised by the bank's hesitation to raise the policy rate in January. Macklem acknowledged in April that the central bank had underestimated inflation pressures and promised to act more forcefully to bring them under control.

The economy had gotten used to low inflation and low interest rates, but the pace of rate hikes is hard to take. Macklem doesn't seem to care about the challenging dynamic.

Macklem said that higher interest rates will make it more difficult for Canadians to deal with high inflation. Raising borrowing costs in the short term will bring inflation down over time. We all suffer from high inflation. It makes it hard to plan our spending and save decisions. It hurts confidence in our economy.

The threat of a wage-price spiral as Canadians look for higher salaries to combat rising cost pressures is one that both central bankers and economists say won't be solved overnight.

Bay Street economists are torn between a 50- or 75-basis-point hike. They agree that the Bank of Canada has more to do to balance supply and demand in the economy by curtailing demand.

Macklem said that this is an ongoing priority for the bank and that he would go further in bringing inflation back to 2%.

It is the best way to protect people from high inflation. We are determined to do it.

The email address is shughes@postmedia.

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