Bank of Canada warns of inflation 'feedback loop'

financialpost.com:

Bank of Canada official Nicolas Vincent has warned there could still be significant hurdles when it comes to getting inflation back to the central bank’s target of two per cent.

The Montreal speech on Oct. 3 was the first by Vincent in his role as external non-executive deputy governor. He is also an economics professor at HEC Montréal.

Beyond the human toll, the COVID-19 pandemic upended the economic orthodoxy in ways the central bank did not necessarily account for. With little to do and nowhere to go, Canadians accumulated savings at a rapid clip — hitting a savings rate high of 26.5 per cent in the second quarter of 2020 — which is still being drawn down. This, in combination with a surprisingly resilient labour market, has led to pent-up demand — and the cash to back it up — creating supply-demand imbalances, said Vincent.

“A robust labour market and savings accumulated during the pandemic have supported strong consumption,” he said. “This has created what economists call a state of excess demand — a situation where demand runs ahead of supply— thereby driving up prices and wages.”

Then there are the factors the Bank of Canada can’t control, such as energy prices, which are determined by global markets. Gasoline prices, for example were up 0.8 per cent year-over-year in August, according to data from Statistics Canada (after falling 12.9 per cent year-over-year in July), making it one of the main contributors to headline inflation’s rise to four per cent. That higher cost of gas raises the cost of many other goods and services. Your local restaurant, for example, has to get its vegetables somewhere, and the increased costs it faces are passed along to consumers, contributing to higher inflation.

Not just consumers