As the BoC considers 2023, persistent inflation is more dangerous than recession.

Tiff Macklem, Bank of Canada Governor, has set his sights on getting inflation back at the sweet spot of 2 percent. However, this will require delicate balance.

Macklem, in his December end of year speech, stated that “We are trying to balance out the risks of over-tightening and under-tightening monetary policy”.

“If we raise interest rates too often, we can drive the economy into a painful recession and fail to meet the inflation target.” Inflation will continue to rise if we don’t increase them enough. Businesses and households will expect high inflation.

Macklem is trying for a so-called soft landing. But he also made it very clear which option he preferred in the event hot inflation persists, and there is a possibility of crashing into recession.

He stated that inflation is running at a high rate of growth, which poses a greater risk.

“If high inflation persists, higher interest rates will be necessary to restore price stability and the economy will need to slow down even further.”

2022: Inflation year

Inflation first appeared at the end of 2021, but it was 2022 that caused it to explode onto the scene.

The Consumer Price Index, or CPI, reached new heights that were not possible in almost four decades. It appears that it has now hit an all-time high. a peak of 8.1 per cent annually in June. As a result of Russia’s invasion in Ukraine, energy prices rose throughout the year. The prices of hotel and airline tickets soared as more Canadians sought to travel for the first times since the COVID-19 Pandemic. While the supply chain issues that were causing havoc throughout the pandemic have subsided, there are still problems that continue to plague the country.

Inflation has had a particularly devastating effect on Canadians shopping at the grocery stores. Food prices are at an all-time high, with food prices reaching new heights that have not been seen in 41 years. In addition to rising interest rates, shelter costs have been increasing. In November 1983, mortgage interest rates jumped at an unprecedented rate. Rental rates have also skyrocketed. According to Rentals.caThe average rent listed for all types and sizes of units in Canada rose 12.4 percent annually to $2,024.

The Bank of Canada took aggressive measures to increase interest rates in response to the soaring inflation. In 2022, the Bank of Canada increased its benchmark rate 400 basis points. This is the highest increase in any year. The Bank has indicated that the tightening cycle is slowing down, as the economy shows signs it is slowing. However, November’s CPI data leave the door open to further rate increases.

“Inflation projections weren’t near high enough in the year 2022 and there’s no reason for them to be substantially better in 2023. In a preview note for 2023, Benjamin Reitzes, BMO Capital Markets macro strategist, stated that there is more chance of a high-side surprise next year.

There is also concern that inflation may persist as the forces that previously helped keep prices lower – such as lower-cost global supply chains and a boom in the working population – hit challenges.

“In the near future, it appears likely that supply chains are shorter, more diversified, and more resilient. Macklem spoke in December about how trade will likely become more trusting to better partners.

These changes will increase resilience, but at the expense of efficiency. And this adjustment could cause production costs to rise, increasing prices.

Macklem may find it more difficult to hit the two percent target, but he said that “how much harder is very hard to say.”

Recession on the rise

Now economists are examining the effect of central banks’ aggressive rate hikes around the globe. Many expect a recession.

“We expect the world will slip into recession in 2023 due to the effects of high inflation, rising interest rates and felt pain,” Jennifer McKeown, chief global economist at Capital Economics, said. She added that Canada’s recession should not be severe and allowed the Bank to loosen policy in 2023.

“The consolation of this is that inflation seems to be declining, which should encourage central bankers to let go of the accelerator and allow a recovery late next year.”

McKeown warns that if Canada’s labour market is weaker than anticipated, then the Canadian household debt could lead to a similar deleveraging cycle to the one in the United States.

McKeown stated that “as the affordability of the housing market is at its worst in decades, house price would be even more vulnerable in such a scenario and Canada would experience a deeper recession.”

Macklem also suggested that a recession could be necessary to control inflation.

“The only reason that we even talk about a recession, is because of raging inflation and the harsh medicine necessary to control it. “Monetary policy is always successful, and this is clearly an policy-induced slowdown,” Douglas Porter, BMO chief economist, said in a note for clients.

“The best news for the economy and financial markets would be if that policy works fairly quickly and inflation recedes faster than expected, which would significantly raise the odds of our more benign scenario—and we should have a good read on that front by the spring.”

Macklem claims the adjustments are “worth it.”

Macklem stated in his last speech of the year, “Our monetary policies are working and once we all get through that adjustment, our economy will grow healthyily with low inflation.”

“If we keep our feet on the ground, that’s what we can expect.”

Alicja Siekierska, a senior reporter at Yahoo Finance Canada, is Alicja Siekierska. Follow her on Twitter @alicjawithaj.

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