MNI: BOC-Sticky Inflation Clouds Return To Target By Mid-2025

Sticky inflation including the potential for firms to keep raising prices more aggressively following the pandemic may complicate the Bank of Canada's work to restore price stability, Deputy Governor Nicolas Vincent said Tuesday.

"In July we said that inflation should gradually return to the 2% target by the middle of 2025 as excess demand dissipates and labour market conditions ease. We will be providing another update on Oct 25, but it is clear that we are not out of the woods yet," Vincent said in the text of a speech in Montreal. "We need to acknowledge that an unusual amount of uncertainty continues to cloud our view. And we remain concerned about the persistence of underlying inflation, which may complicate our return to price stability."

Nicolas give no view on the outlook for the Bank's 5% policy rate and the potential for another increase or a high-for-long policy, or recent data showing sluggish GDP growth and employment. The Bank left its key rate at the highest since 2001 last month and signaled officials remain prepared to hike again because of the risk elevated price gains become entrenched amid slow progress wrestling down inflation. Investors are split on whether another hike is coming this month with the Bank also citing progress Vincent reiterated today around inflation coming down amid the drag of previous tightening. (See MNI INTERVIEW:Poloz Sees Conditions For Rates Easing Next Year)

RISK PRICING BEHAVIOUR PERPETUATES

Most of the speech examined why the Bank's economic models haven't captured some of the upward inflation pressure linked to companies that raised prices more often and by larger amounts through the pandemic, adding staff are now looking at micro-data from the CPI report, corporate earnings calls and data from its own quarterly surveys of executives. Most of that evidence, along with some similar data from the UK and U.S., suggest moderation in price increases but not a return to historical patterns, Vincent said.

"Perhaps the biggest risk of all is the idea that recent pricing behaviour could become self-perpetuating," he said. It was the first public speech by Vincent, named in March as a new type of deputy governor. He works part-time at the Bank over a two-year term, as opposed to traditional full staff deputies, while keeping an outside job at Montreal’s HEC business school.

Noting inflation has slowed from a peak of 8.1% to 4%, he also said "despite this progress, the downward path of inflation over the past year has been slower than anticipated" and "we need to stay the course and continue our pursuit of the 2% inflation target." The Bank sets interest rates to keep inflation in the middle of a 1%-3% band and return to target within two years, and price gains have already topped 2% since March 2021.