Why the BoC will continue to target inflation

The governor of the Bank of Canada said that inflation will continue to be driven by the same fundamental forces even as the global economy evolves.

Stephen Poloz told an audience of the CFA Montréal and the Montreal Council on Foreign Relations that inflation has not met targets because of the excess supply in many economies after the Great Recession.

But he hit back at those who say soft inflation means targeting that element of the economy is ineffective.

“Fundamentally, we know how inflation works,” the Governor said. “The laws of supply and demand have not been repealed.”

Mr Poloz said that slow wage growth is due to slack in the labour market and changing demographics among several reasons and is not evidence that inflation is less affected by fundamentals.

He added that globalization and digitalization are likely having an impact on inflation but do not yet materially add to the bank’s understanding of inflation.

“The bottom line is that inflation targeting has worked, through good times and bad, for more than 25 years. It continues to work today. And Canadians can be confident that it will continue to work for years to come,” said the governor.

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