A senior Bank of Canada official says the central bank isn’t sure when supply-chain issues will work themselves out and ease inflationary pressures.
Deputy governor Toni Gravelle says the uncertainty caused by the pandemic and unprecedented economic conditions makes it hard to pinpoint when supply-chain problems will peak.
The central bank in October said it expected that peak to hit before the calendar turned to 2022, before gradually unwinding over the ensuing months.
Speaking virtually to the Surrey Board of Trade, Gravelle says it is difficult to gauge how quickly supply issues will be resolved, which is partly why the central bank has kept its key policy rate on hold.
The bank on Wednesday left the rate at 0.25 per cent and reiterated its previous guidance that it didn’t foresee any increases in the trendsetting rate until at least April.
Gravelle says while the bank still expects inflation to ease by the second half of next year, monetary policy-makers are watching inflation expectations and labour costs so they don’t cause a spiral of price increases.
“If supply disruptions and related cost pressures persist for longer than expected and strong goods demand continues, this would increase the likelihood of inflation remaining above our control range,” Gravelle said in the prepared text of his speech.
“This could feed into inflation expectations and contribute to wage pressures, leading to a second round of prices increases.”
The annual inflation rate last month hit an 18-year high in October when the consumer price index increased by 4.7 per cent compared with the same month one year earlier.
The Bank of Canada’s mandate is to keep inflation between one and three per cent, but it has let the rate creep up to help the economy heal from the steep downturn the country experienced at the onset of the pandemic.
Supply chain issues have helped push up the inflation rate, as consumers have focused spending on goods instead of high-contact services. There has also been increases in shipping costs, delays at ports and challenges for companies to source parts that have helped drive up costs.
As a result, the average inflation rate for goods this year has been 4.4 per cent, compared with 2.1 per cent for services, Gravelle said. In the two decades prior to the pandemic, the rates were 1.4 per cent and 2.4 per cent, respectively.
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Gravelle said the bank expects consumers to shift their spending toward services, which should ease pressure on goods, and trade bottlenecks to resolve themselves so supply can catch up.
While there are early signs that some supply constraints are easing, such as those for semiconductor chips, Gravelle pointed to other problems including flooding in British Columbia that he said will likely worsen backlogs at the Port of Vancouver.
He also noted the Omicron variant of COVID-19, saying consumers could pull back on service spending and put more upward price pressure on goods.