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Has inflation peaked? Economists expect slowdown in coming months

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As the Bank of Canada’s final policy rate decision for this year approaches, some economists say we could see lower inflation in the coming months.

inflation Stable in October At 6.9% year-on-year, it is far from the Bank of Canada’s target of 2%. The central bank has raised interest rates six times in a row this year, all with the goal of keeping inflation down.the next one Policy interest rate decision It will be held on December 7th.

In a telephone interview Monday, Peter Dungan, an economics professor at the University of Toronto’s Rotman School of Management, said it was “certainly possible” that inflation had peaked.

Dungan said oil and food prices surged early in the year, impacting the consumer price index (CPI). Because the consumer price index measures current costs relative to the previous year, inflation could subside as food and fuel prices fall, Dungan said.

“What’s going to happen is next March, April. [and] Inflation will drop significantly in May, as it measures year-on-year changes against price levels that already include rising oil and wheat prices.

“So unless oil and wheat prices continue to rise, if they haven’t so far, what will happen is the change in prices, inflation will fall.”

However, Dungan said rising energy and food costs are reducing consumer purchasing power. According to Dungan, lower purchasing power reduces consumer demand and therefore works to lower inflation.

“And that would have happened whether or not the Bank of Canada raised interest rates,” he said.

forward guidance

The Nov. 7 University of Toronto economic forecast showed that inflation would fall from 6.8% in 2022 to 4% in 2023, fall to 2.2% in 2024, and return to 2% in 2025. Predicted.

“One of the things I am most sure of is that two, three, [or] For up to four years, inflation will somehow return to the 1-3% range. There is nothing on the horizon to stop it, except a global disaster,” Dungan said.

In a Nov. 18 note to investors, James Orlando, a senior economist at Toronto-Dominion Bank, said he expects inflation to start slowing in the coming months.

“Weak global demand is expected to put further downward pressure on energy prices and rapidly declining transport costs. , should help lower inflation in the coming months,” Orlando said.

The central bank has raised interest rates six times in a row since March, and it is expected to take several years for these moves to seep into the Canadian economy.

according to bank of canadait usually takes about 18-24 months to see the full effect of a policy rate change.

Dungan said each time it was raised, the impact would be further delayed.

“So, in a sense, the endpoint of all rate hikes is moving further and further into the future as rate hikes occur,” he said.

expectation

Dungan said the successive rate hikes are having an impact on the economy as a whole, raising questions about whether the central bank should wait to see the impact before raising borrowing costs further. .

“And the main answer to that is expectations. The big danger in the event of inflation, even if . That’s it.

Mr. Dungan argued that if inflation expectations were allowed to take hold, workers could demand higher wages broadly, and that rising wages under these assumptions would lead to wage-price spirals similar to those of the 1970s and 1980s. He said it could be connected.

“What [central] Banks have really tried [to] grab people’s attention [and] Make it clear to people that we are not going to examine future inflation increases. We may have had to overshoot interest rates to do that.”

As such, Dungan said, based on the importance of expectations, the central bank may not stop raising interest rates until inflation starts to recede.

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