Is Inflation Keeping Pace with Bank of Canada Targets?

Over the past few years, Canadians have seen a huge increase in the cost of many goods and services. These increased prices can feel overwhelming at times, but are they just a sign of a healthy economy? Is inflation keeping pace with Bank of Canada targets, or has it gone out of control?

Here, we answer these questions and help provide some clarity on the current Canadian financial landscape.

Before we discuss whether inflation is keeping pace with Bank of Canada targets, let’s look at what inflation is and how the Bank of Canada sets its targets.

Understanding Inflation

Inflation, or the gradual increase in the general price level of goods and services, is a natural part of any growing economy. It’s measured through various indices, such as the consumer price index (CPI), which tracks the changes in prices over time.¹ Central banks use these indices to gauge the overall health of the economy and make informed decisions about monetary policy.

Bank of Canada's Inflation Targeting

The Bank of Canada, like many other central banks, employs inflation targeting as a key monetary policy tool. The primary goal is to achieve a low and stable inflation rate, typically around 2%.² This target is considered optimal for balancing economic growth, employment, and price stability.

The Bank of Canada reviews its inflation target every five years, considering various economic factors and trends. These reviews help ensure that the target remains relevant and effective in the evolving economic landscape.

Factors Influencing Inflation

Several factors contribute to changes in inflation rates. Supply and demand dynamics, global economic conditions, and geopolitical events can all impact the price of goods. Central banks closely monitor these factors to adjust their policies accordingly.

Additionally, fiscal and monetary policies, such as interest rates and money supply, play a crucial role in controlling inflation. The Bank of Canada may increase interest rates to cool down an overheating economy or lower rates to stimulate growth during economic downturns.

As of January 2024, the Bank of Canada has held interest rates at 5%. The last interest rate hike was in July 2023.³

Is Inflation Keeping Pace with Bank of Canada Targets?

In looking at the target rate of 2% and the current inflation rate of 3.4% (as of December 2023), we can see that currently, inflation is above Bank of Canada’s target.³

That being said, the Bank of Canada has projected when inflation is expected to return to its target rate. According to Reuters, inflation is projected to hover at around 3% throughout the first half of 2024, ease to 2.5% later in the year, and return to the target rate “sometime in 2025.”⁴

The process of achieving and maintaining the 2% inflation target is not always straightforward. External shocks, unexpected events, and structural changes in the economy can pose challenges to this goal.

In recent years, the global economy has experienced periods of both low and high inflation, requiring central banks to implement innovative measures. The use of unconventional tools, such as quantitative tightening, has become more prevalent as central banks aim to reach their targets. As of January 2024, the Bank of Canada is continuing its policy of quantitative tightening.⁴

Understanding whether inflation is keeping pace with Bank of Canada targets requires a nuanced analysis of economic indicators and policy measures. While the central bank aims for stability, the dynamic nature of the global economy poses challenges in limiting inflation to the established 2% target.

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