The bank’s view that recent high inflation readings were temporary has evolved as inflation has crept upwards. And continued government spending — justified in the early pandemic days, harder to justify today — has added an unhelpful push to prices, with overall spending now outpacing our current production capacity.Article content
Unfortunately, the same policy decisions have been made abroad, leading to the same inflationary response. Australia had 3.5 per cent inflation in December, the Euro area 5.0 per cent; the U.K. 5.4 per cent and the U.S. a whopping 7.0 per cent. In each country, headline inflation was up from November. Yes, inflation is a worldwide phenomenon — but mainly because almost all countries are following the same inflationary policies.
With prices continuing their rise, however, the world’s central banks have become significantly more hawkish on inflation. The Bank of England raised its policy rate in December for the first time since the beginning of the pandemic . The Federal Reserve has said it will begin raising its policy rate in March and will start to trim its balance sheet.Article content
In the long run, the inflation rate in any economy with a flexible exchange rate is determined by that country’s own monetary policy. On the other hand, inflation abroad can exacerbate the difficulties we face taming prices at home. Before the pandemic, Canada’s inflation rate had remained chronically below the two per cent target. Explanations for this phenomenon abound. The bank’shas identified low world inflation as one of the main causes for the bank’s difficulties in hitting its target, the reason being that global inflation is driven largely by energy and food prices, which make up a big part of Canada’s typical consumer market basket.
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