Fighting to get back to low inflation

Governor Tiff Macklem outlines how high inflation is hurting Canadians and how monetary policy is working to bring it down. He also explains why the Bank of Canada must stay the course in its inflation fight.

High inflation makes life harder for everyone

The economy and job market have done quite well since the worst of the COVID-19 pandemic.

But Canadians aren’t happy—and high inflation is a major reason why.

Almost 9 out of 10 people responding to our Canadian Survey of Consumer Expectations said high inflation has made them feel worse off. We can see the impacts of high inflation in other ways too:

• Labour strikes have increased, with employers and workers struggling to agree on fair pay.
• Businesses have been raising their prices more often than usual, and by larger amounts.
• Our surveys show families are spending less and trying to find cheaper goods and services.

High inflation is particularly hard for lower-income Canadians. They have little savings to buffer higher prices, and necessities—food, rent, gasoline—have had some of the fastest price increases.

Inflation was especially high and harmful in the 1970s

Back in the ‘70s, just as now, global economic forces caused prices to climb around the world. However, inflation rose higher then, and remained high for longer, peaking at almost 13% and averaging more than 7% for the decade.

With such high inflation throughout the ‘70s, that decade also had a lot of strikes—many of which were long and heated. People felt ripped off because they’d get raises but prices would keep on rising.   

Policy-makers tried to get inflation down, but their measures were either ineffective or too timid. Eventually, it took very high interest rates and a deep recession with high unemployment to lower inflation.

Returning to low inflation will be smoother this time

Higher interest rates have cooled the overheated economy and taken the steam out of inflation—which has fallen from a peak of 8.1% in June of 2022 to 3.1% last month.

We’re confident we’ll get back to low inflation faster this time around and at lower economic cost. That’s because of some clear advantages we have now compared with during the 1970s:

• an inflation target and strong track record
• a forceful and sustained response to high inflation

Inflation in Canada was close to target most of the time in the 25 years before the pandemic. That stability meant people could budget knowing that their money would largely hold its value.

As well, we responded forcefully to high inflation. We’ve raised our policy rate from close to zero in early 2022 to its current level of 5%.

We know many Canadians see higher interest rates as another added cost. And we know slower economic growth doesn’t feel great for people. But letting high inflation linger would be worse.