As Canada’s growth accelerates along with the pace of vaccinations, attention has turned to pent-up household demand and its potential impact on prices. With stimulus dollars flowing and prices for commodities and building products on the rise, concerns about inflation have emerged.<\/p>\n
The view that prices will rise isn’t misplaced, but it shouldn’t be overstated. The Bank of Canada will look through spiking energy prices relative to year-ago levels near-term, but we also expect core measures of inflation to drift up to the 2% inflation target or above in 2022. That, combined with a much-improved economic backdrop, will likely spur the central bank to gradually begin to raise its key interest rate from its current, exceptionally low level. However, price growth in Canada isn’t likely to break un-sustainably higher over the longer term, as long as the multiple actors in the economy continue to expect that the central bank will act to keep prices in check\u2014sentiment that so far shows few signs of changing. Retail competition too will exert downward pressure on prices.<\/p>\n