Introduction

Good afternoon. I am glad to be with you here in Halifax. Its been a tough couple of weeks for Atlantic Canada. I want to extend my condolences for the lives lost during the terrible storm. My sympathy goes out to all of those affected across the region, including Bank of Canada employees in our office here in Halifax. The damage and destruction bring a new wave of hardship after what has already been a difficult couple of years.

Canadians have faced historic challenges since 2020. And recovering from these challengesjust like rebuilding from the aftermath of Hurricane Fionawill take time. The global COVID-19 pandemic has sparked a challenge that is particularly pressing to the Bank of Canadahigh inflation. And thats what I want to talk about today.

High inflation is making life more difficult for Canadians, especially those with low or fixed incomes. Some of this inflation reflects global developments that we dont control, but inflation in Canada increasingly reflects whats happening in Canada. The demand for goods and services here at home is running ahead of the economys ability to supply them. Businesses are having a hard time finding enough workers. And what started as higher prices and delays for many internationally produced goods has broadened to many services.

Inflation in Canada peaked at 8.1% in June and has declined for two months. Thats welcome news, but inflation will not fade away by itself. To get it back to more normal levels, we need to slow spending in the economy so supply can catch up with demand. This will help relieve price pressures here in Canada.

In September, we raised our policy interest rate for the fifth consecutive time since March. And we indicated that interest rates will likely need to go higher still to bring inflation down to the 2% target. Later this month, we will take our next monetary policy decision, and we will update our economic outlook for growth and inflation at that time.

But today I want to do three things. First, I want to unpack the run-up in inflation over the past year or so and review how the factors behind inflation in Canada are shifting from global to domestic and from goods to services. Second, I want to review the inflation indicators we are particularly focused on as we assess where inflation is headed. Finally, I want to acknowledge the hardship that high inflation is creating for many Canadians and underscore the imperative of getting inflation all the way back to the 2% target.

The sources of inflation are broadening

Heading into the pandemic in 2020, Canadas total consumer price index (CPI) inflation was 2.2%roughly on target. But when the world locked down, inflation fell steeply, dipping below zero. Prolonged deflation and economic depression were real concerns. The Bank responded with exceptional monetary support, first to put a floor under the crisis and then to help the economy regain its strength.

Fortunately, combined with exceptional fiscal stimulus, it worked. We avoided deflation, and the deepest recession on record was followed by the fastest recovery ever.

But repeatedly closing and reopening economies around the world brought new challenges. Households shifted their spending from in-person services to durable goods, straining global supply chains that were already disrupted by public health restrictions. Shipping bottlenecks and shortages of key intermediate inputs meant long delays for goods like cars, bicycles and appliances. So by 2021, we began experiencing higher prices for many internationally traded goods.

As Chart 1 shows, inflation in goods excluding food and energy rose to about 3.5% by July 2021, while inflation in services excluding shelter was only around 1%. Add in higher global energy prices in 2021, and goods price inflation was about 4.5% by the middle of that year.

With higher goods prices, total CPI inflation was moving up in 2021 too, but it was largely a story of higher inflation for global goods spilling into Canada. Inflation was rising in most advanced economies, and Canadian households were feeling the effects of higher global inflation (Chart 2).

At the time, we assessed that the effect of these global forces on inflation was likely to be transitory. Historical experience has taught us that supply disturbances typically have a temporary effect on inflation, so we tend to look through them. A year ago we expected inflation in goods prices to moderate as public health restrictions were eased, production ramped up and investment in global supply chain logistics picked up. In hindsight, that turned out to be overly optimistic.

Indeed, global inflationary pressures stepped up in 2022. The unprovoked Russian invasion of Ukraine in February drove up the prices of commoditiesparticularly energy and agricultural goodsand created new disruptions to already impaired global supply chains. Canadians experienced these effects almost immediately with higher gas prices at the pump and big price increases for many basic food items at the grocery store.

But the other thing that changed in 2022 was inflation in the prices of services. As the economy fully reopened in the spring, pent-up demand for all the services wed missed over the pandemic started driving up their prices, especially in areas like travel and recreation. Canadians experienced these pressures first-hand when trying to book a campsite or reserve a table at their favourite restaurant. Services price inflation rose quickly through the first half of 2022, reaching about 5% this summer.

With further increases in goods prices in 2022 and a rapid rise in services prices, total CPI inflation rose sharply, reaching 8.1% in June.

Over the last two years, the pandemic and the war have affected lives and livelihoods. They have also had a profound impact on inflation. Our job at the Bank of Canada is to restore price stability.

Global inflation may be starting to ease

In the last two months, headline inflation in Canada has come down to 7%. This largely reflects lower gasoline prices. In mid-June, filling up in Halifax cost $2.15 a litre on average. By the end of August, that had fallen to $1.64.

More generally, there is some evidence that global inflationary forces have begun to ease, though they remain elevated. A range of global commodity prices are starting, finally, to fall from their highs. Oil prices have come down, and the prices for key agricultural commodities have also eased back. In time, with lower input and transportation costs, we should see food inflation begin to come down.

Supply bottlenecks have also begun to improve (Chart 3).

Global manufacturers report that delivery times are still longer than usual, but they are getting shorter, and input cost pressures are easing. Global shipping costs have also come down from exceptional highs.

These signs of improving global supply chains are encouraging, but we cant count on easing pressure on global prices to lower inflation in Canada. At a minimum, improving global factors will take time to filter through to Canadian inflation. And the recent depreciation of the Canadian dollar in the face of US-dollar strength will offset some of this global improvement by making US goods and vacations more expensive for Canadians. There is also considerable uncertainty about the evolution of global supply chains and commodity prices. The global economy remains highly disrupted by the effects of the pandemic and the war in Ukraine. Predicting international price movements isnt easy, and the global inflation picture could change quickly. Unfortunately, we dont have much influence over that.

Our focus is getting domestic inflation down and

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