The private sector might make price- and wage-setting decisions in response to elevated inflation
Preventing current inflation levels from becoming entrenched in the public’s expectations is a crucial strategy in ensuring that recession risks do not materialize, according to former Bank of Canada governor Stephen Poloz.
Existing trends point to private sector firms making price- and wage-setting decisions in response to mounting inflation – a development that could further push up inflation instead, Poloz said.
“The risk is [inflation] infects our economy, it gets embedded and stays there, to some degree,” Poloz said. “Of course it would never be near 100%, but it could be meaningful.”
This is despite annualized inflation moderating from 7.6% in July to 7% in August, data from Statistics Canada showed.
Read more: Bank of Canada says inflation is still too high
However, Poloz said that it’s likely that the current inflationary cycle is a temporary state of affairs – especially since the BoC’s outsized rate hikes so far this year have yet to make an actual impact on economic numbers.
“It means [inflation] is going to go away more or less by itself in time,” Poloz said. “But if it takes one year for it to climb up, it has to take a full year for it to flatten and another full year for it to go away.”
