A new inflation report by Scotiabank warns that well over half of cost increases observed in Canada reflect global supply challenges, impacting inflation expectations and monetary policies.
Through a macroeconometric forecasting model, used to determine causes for increased inflation since the end of 2019, Scotiabank reports that 50 per cent of the increase in inflation over the last two years can be “ascribed to global or foreign affairs.
“These include U.S. inflation, commodity prices and movements in the exchange rate,” the report reads.
Additionally, the report says supply challenges that largely reflect developments at the global level account for another 35 per cent of the rise in inflation.
The report also mentions the fiscal support packages issued by the federal government as a response to the pandemic, such as the Canada Emergency Response Benefit, the Canada Recovery Benefit and the Canada Wage Subsidy, collectively raised the output gap – which is the difference between what an economy actually produces and what it would produce in an ideal world — by about 1.3 percentage points, “implying that the excess demand we see now in Canada would not be present without these supports.”
The report adds that pandemic support programs for firms and households are fostering the excess demand throughout the country.
“Absent from these support measures, Canada would still be in excess supply,” the report says.
As any increase in the output gap only accounts for less than half a percentage point of the rise in inflation since the end of 2019, Scotiabank says it accounts for up to 125 basis points of the total tightening expected by the Bank of Canada.
“We estimate that up to 125bps of the total rise of 400bps that we currently expect (from 0.25 per cent at the start of the tightening phase to our expected endpoint of 4.25 per cent) is in response to pandemic support measures.”