The Bank of Canada is starting to worry about inflation.
Not because it sees any, mind. The Consumer Price Index (CPI), in which the central bank insists that it still has confidence, suggests inflation is non-existent. The CPI rose only 0.1 per cent in July from a year earlier, suggesting deflation is a bigger risk than runaway prices.
Still, Carolyn Wilkins, senior deputy governor at the Bank of Canada, conceded in a speech on Aug. 26 that a growing number of Canadians are losing faith in the CPI and therefore in the central bank’s assurances that inflation is under control.
That matters because there is a self-fulfilling element to cost dynamics: If we think prices are rising, they probably will. And if the central bank can’t control expectations, it might have to raise interest rates sooner than it would like in order to stay within range of its inflation goal, which at the end of the day is its only job.
Continue reading at the Financial Post ...