“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” (Lewis Carroll, Through the Looking-glass)
Transitory (n): of brief duration; temporary. (Merriam-Webster)
Another month, another jump in that "transitory" inflation we keep hearing about. Statistics Canada reported this morning that Canada's consumer price index (CPI) rose 4.4 percent in the year to September. That's up from the 4.1 percent rise reported for August, and represents the fastest pace of consumer inflation since February 2003.
Gasoline prices continue to be a major driver of the headline figure, rising more than 30 percent from a year ago. If gasoline were excluded from the index, the annual rise in CPI would have been 3.5 percent. It's not just about gas prices, however. Every major component of the index rose in September, with significant gains reported for shelter costs (up 4.8 percent) and food, up 3.9 percent, led by a 9 percent rise in the price of meat.
Two of the Bank of Canada's three preferred measures of core inflation ticked higher once again in September. The average increase of the three has now reached 2.7 percent, well below the headline number but moving steadily further away from the 2 percent target. The Bank's next Governing Council meeting and rate announcement are set for October 27; Governor Tiff Macklem has already admitted that the "transitory" rise in inflation has been sharper and more persistent than the Bank anticipated, and it will be interesting to see how the rhetoric changes next week.
Ever since the pandemic threw a wrench into monetary policy, the Bank of Canada has stressed its willingness to allow a period of above target inflation in order to sustain recovery in output. However, it has also stressed that it wishes to keep inflation expectations anchored at the 2 percent level, in order to maintain the long-term credibility of its policy approach. That credibility is coming under stress as inflation remains stubbornly high.
Financial markets are starting to bring forward the expected date for the start of a rate tightening cycle. My own former shop at TD Bank is fairly typical: it now sees a rate hike in July 2022, versus an earlier expectation of October, and it now sees a total of 75 basis points of tightening by the end of next year, bringing the Bank's target rate to 1.0 percent. It is evident that similar concerns are being felt outside the financial sector, The Bank of Canada's quarterly Business Outlook Survey, published at the start of this week, reported as follows:
Almost half of businesses now expect inflation to be above 3 percent over the next two years, with most anticipating it will be between 3 and 4 percent. Firms with inflation expectations above 3 percent frequently cited the following factors as supporting their expectations:
- supply chain disruptions
- fiscal and monetary policy stimulus
- recent increases in food and energy prices
In response to a special topic question, most firms anticipating inflation above 2 percent and about half of those with expectations above 3 percent said that the drivers of higher inflation are temporary.
The Bank may take some consolation from that final sentence, but it cannot ignore the messages it is receiving from financial and non-financial businesses alike. Next week's Governing Council meeting is likely to agree to reduce the scale of quantitative easing, and may offer a signal that once QE is wound up, actual rate hikes will not be long in coming. The credibility that the Bank has built up over the past two decades and more is at stake.
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