Speaking a day after we decided to hold the policy rate, Senior Deputy Governor Carolyn Rogers talks about the factors behind high inflation and how we know inflation is falling.

Watch Senior Deputy Governor Rogers speak to the Manitoba Chambers of Commerce. Read the full speech.

Our decision yesterday

Based on what we are currently seeing in the economy, we decided to hold the overnight rate at 4½%. We are also continuing our policy of quantitative tightening.

How global forces sparked high inflation

At the beginning of the COVID‑19 pandemic, prices for commodities like oil, natural gas and lumber plummeted. Because the economy was shut down, people had fewer opportunities to eat out or travel, so demand shifted suddenly from services to goods. But pandemic shutdowns also affected important pieces of the global supply chain, such as factories and ports. This meant that supply couldn’t keep up with all the extra demand for goods. As a result, prices surged.

When economies reopened, prices for these commodities spiked suddenly. And because these commodities feed into so many other products and services, the ripple effect on other prices was widespread. Then Russia’s invasion of Ukraine made prices surge even more.

In a nutshell, the following global forces combined to create a perfect storm:

• a spike in commodity prices
• a surge in the global demand for goods
• impaired supply chains

How domestic forces fanned the flame

The Canadian economy recovered quickly because businesses and workers were resilient through pandemic lockdowns. As the economy reopened, Canadians were anxious to catch up on things they had missed, so a lot of spending shifted from goods back to services.

But businesses—many of which had laid off employees during the lockdowns—struggled to hire and train enough staff to meet the spike in demand. This resulted in labour shortages that placed even more pressure on production costs. With demand increasingly strong and supply chains still impaired, many businesses began passing on higher costs to their customers by raising prices.

These conditions resulted in global inflation taking hold in Canada.

Global and domestic forces are now cooling inflation

Inflation has started to fall recently in part because the global factors that caused it to rise are easing:

• commodity prices and shipping costs are dropping
• supply chains are recovering

Meanwhile, we have been raising interest rates since March 2022 to rebalance demand and supply here at home.

While we’ve seen improvements in recent months, inflation remains too high. We still have work to do to return to our 2% target.

Canada’s unique path

Even at 5.9%, Canada’s current inflation rate is the second lowest in the G7. We started our fight against inflation relatively early, and we’ve aggressively raised interest rates by 4.25 percentage points since early 2022. This was the best way to prevent the need for even larger increases—and more pain—later.

Since interest rates started rising last year, Canada has had the sharpest growth of gross domestic product in the G7. Our labour market also remains strong. While positive, these developments risk putting extra pressure on inflation going forward, especially since Canada’s productivity growth remains low. However, with weak economic growth expected for the next couple of quarters, pressures in product and labour markets are expected to ease.

We will continue to watch developments in the economy very closely. We are committed to getting inflation all the way back to 2%.

Watch Senior Deputy Governor Rogers answer questions from the media following her speech.