Jack Mintz: Carbon taxes make the Bank of Canada’s job harder

financialpost.com:

With July inflation ramping up again on Tuesday, it’s obvious the battle ain’t over yet. The headline inflation rate jumped to 3.3 per cent from last month’s 2.8 per cent. While mortgage costs and food are major contributors to our stubborn inflation, energy prices have risen 5.8 per cent in the past four months, thanks in part to the carbon tax hike last April 1.

As the world continues its march to net-zero emissions by 2050, an interesting debate is rearing its head as to whether the energy price inflation will affect monetary policy. That point was made last year by Isabel Schnabel, a member of the European Central Bank’s Executive Board: “As we build a more sustainable economy, we face a new age of energy inflation … that can be expected to lead to a prolonged period of upside pressure on inflation,” she warned.

Putting it in simple terms, carbon policies not only lead to more inflation but could contribute to higher interest rates when central banks fight inflation. So, if Canadians are already suffering from energy costs that filter through the whole economy, they will also face higher interest rates as well. Good for savers but bad for borrowers.

That conclusion is not without controversy. Monetary policy is focused on inflationary expectations. Expectations are important because firms will raise prices and workers will bargain for higher wages if they believe prices will continue to rise. If inflation is above the target rate — two per cent — inflationary expectations that are currently well above the target rate push central banks to raise interest rates.

The argument that energy prices influence inflationary expectations runs as follows. The energy price is obviously an important part of transportation costs