Finance Committee on Feb. 16th, 2023

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I wanted to ask about the role of the federal government in fighting inflation.

The fiscal plan that the government laid out in the fall economic statement—the last “mini-budget”, if you will—would see a continued reduction of the federal deficit and the debt-to-GDP ratio, which is the ratio of debt to the size of our economy.

At this time, and given these plans that the government has, is the government's fiscal policy—its spending policy, effectively—working in line with the Bank of Canada's plans and efforts to lower inflation?

[Tiff Macklem]

As I said, we really leave fiscal policy to governments and parliamentarians. We take it as given and then we do what we need to do.

Through the depths of the pandemic, the government had very expansionary fiscal policy. Monetary policy was also exceptionally expansionary. That was needed. We went through the deepest recession in history. The good news is that we've had the fastest recovery. We now are on the other side of that and we're dealing with the side effects from that.

Getting back to the previous question, we've built in government plans and those are built into our forecast. If there are new fiscal spending plans, we'll have to take those on board. It will depend what the spending is on.

Some spending mostly adds to demand. In an environment where the economy's already overheated, that wouldn't be terribly helpful. Other types of spending add to supply and demand. For example, increased immigration adds new workers to the economy. New workers also have new incomes, so you have new shoppers as well. That's an example of a policy that would increase the sustainable growth rate of the economy without creating a lot more inflationary pressure.

We would certainly be looking at what the spending was on in assessing what we needed to do.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Do you believe that the provinces should follow the government's lead and restrain their spending to help combat inflation?

[Tiff Macklem]

As I said, we have a big enough job in monetary policy; we're not here to run fiscal policy.

The one thing I will say there, and this gets back to the previous question, is that we are acutely aware that inflation is particularly hard for low-income Canadians and Canadians on fixed incomes. Governments are concerned about their citizens. Federal and, particularly, provincial governments have been taking measures to try to alleviate the impact of inflation on their citizens.

There, I would suggest that the advice coming out of the IMF is quite good. We know inflation is affecting the most vulnerable members of society. Our job is to get it back down so that that problem gets solved, but through that transition there is a role to help the most vulnerable.

The IMF's advice, which I think is good advice, is to keep those measures targeted and temporary. Keep them targeted on those individuals who really need the help and who are really suffering—lower-income Canadians—and temporary while inflation is high. When inflation comes back down, we don't need those anymore.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor.

Thank you, MP Baker.

Now we go to the Bloc and MP Ste-Marie, please, for six minutes.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Mr. Macklem and Ms. Rogers, thank you both for being here today. We always appreciate your excellent analysis of the economic situation.

Mr. Macklem, you said that inflation had peaked in June at 8.1% and dropped to 6.3% in December. The monetary policy seems to be working, then. According to your projections or scenario, inflation could fall to 3% in the middle of 2023 and reach the 2% target by the end of the year or in 2024.

You and Mr. Baker spoke a bit about risk assessment and forecasts. If your forecast comes true, it would be the ideal situation, almost idyllic. That's what I would call the best-case scenario.

I'd like to hear your thoughts on the risks that come with other scenarios, which I'll get into.

I'll start with this. What are the recession risks right now?

I would also like you to talk about the possibility of U‑shaped inflation. By that I mean inflation that continues to drop but starts to rise again at the end of the year because of a robust labour market and higher-than-expected economic growth internationally. What are the risks of that scenario?

Above all, I would like you to comment on the possibility of inflation holding at 3% or 4% annually, instead of returning to the 2% target, mainly because of the services sector. What are the risks of monetary policy not being able to bring inflation back to the 2% target quickly and inflation staying at 3% or 4%?

In that situation, would you pursue a more restrictive monetary policy at all costs, or would you wait to see how the economy responded in the face of a steady inflation rate of 3% or 4%?

I covered a lot there, so take all the time you need.

[Tiff Macklem]

You raised a lot of issues.

I think they underscore how important it is to stay humble when it comes to our forecasts.

You asked about risk, so I'll talk about that.

Yes, there are risks, and what I would say to every Canadian is that our job is to try to manage those risks. We don't know what the future will bring. There are always surprises in store, but we endeavour to manage the risks. That's why we are taking a pause at this time. We've done a lot, so we are using this time to assess whether the measures we've taken are enough. We don't want to do too much because that could slow the economy and cause inflation to drop below the target. At the same time, we need to see this through and do our job. If we only do things halfway, we won't reach the 2% target.

Now I'll come back to the risks, starting with the upside risks. Then, I'll talk about the downside risks.

According to our short-term projections, the greatest inflation risk is tied to higher oil prices, which are determined by world markets. In light of China's sudden reopening of its economy, demand for oil could rise. The price of gasoline could increase here, in Canada, as well. At this point, the price of oil has been relatively steady since we released our last estimates, but we understand that oil prices are highly volatile and can change very quickly.

In addition, we are seeing that inflation related to goods prices, especially durable goods, is beginning to ease, but service price inflation is still high. We are forecasting almost no growth for the first three quarters of this year. If that's the case, we think demand will drop and supply will adjust, creating a more balanced situation. Service price pressures will drop. However, there are risks associated with all of that. We haven't seen this situation yet. There is more uncertainty around service prices, and we know that wages will rise by about 4% to 5%. That isn't consistent with 2% inflation, unless there's a really strong boost in productivity, which we haven't seen in recent years.

During the last period, we saw businesses raise prices, with larger and more frequent increases. Price movement distribution has shifted significantly to the right, and we are already seeing that distribution return to normal. When we talk to people in the business community, they tell us that pricing changes will be closer to normal. We are keeping a close eye on whether businesses return to more normal pricing behaviour.

If wage growth doesn't decrease and if businesses don't return to more normal behaviour, it will definitely be harder to bring down inflation. Through our monetary policy, we would probably have to raise interest rates again.

[The Chair, Liberal, Peter Fonseca]

Merci, Governor.

[Tiff Macklem]

Really quickly, I just want to say that a larger than expected global recession is a possibility, and that would create more downward pressure.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you very much, Mr. Macklem.

[The Chair, Liberal, Peter Fonseca]

Now we're going to the NDP with MP Blaikie. This will be for six minutes, and to finish off our first round.

MP Blaikie.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Welcome back to both of you here at committee.

Earlier you had mentioned that, obviously, oil and gas prices play an important role in determining the overall rate of inflation. You had said, with respect to the carbon tax, that by your calculation it represents about one-tenth of 1% of the current inflation that Canadians are suffering.

I'm curious to know whether you can offer us a similar number for the change in oil and gas prices. We've seen significant price increases. We see record profits for oil and gas companies. What share of inflation is attributable to oil and gas price increases?

[Tiff Macklem]

I don't have a precise number, but the global oil price now is pretty similar to what it was a year ago. If you go back over the year, oil prices were much higher. If you go back six months ago, that was a major contributor to the high inflation we had, if you go back to, say, last summer.

Since then, that contribution has been coming down and oil prices today are not that different than what they were a year ago, so that is falling out. That's one of the reasons why goods price inflation is actually the most important reason; why goods price inflation, which was very high, has started to come down.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Let's put it another way. We have seen inflation come down from about 8.3% at its peak to around 6% or just above 6% right now.

[Tiff Macklem]

That's correct.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

To what extent do you think the decline in oil and gas prices over the last six months or so.... What portion of that reduction in inflation would come from that?

[Tiff Macklem]

It is the biggest contributor. Just to bring it down to the experience that Canadians have, it depends where you are in Canada. If you're in B.C., it's more expensive.

If you filled up your car last summer, it probably cost you more than $2 a litre. I think the Canadian average was around $2.10. Now, I filled up a week ago, and it was $1.55. That has been of some relief to Canadians.

Unfortunately, food price inflation is a different story. Food price inflation is still running at 10% or 11%.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

If we're comparing orders of magnitude, you could say that a reduction in oil and gas prices has allowed inflation in Canada to come down in the order of about 2%—not 2% less inflation, but 2% overall. When we compare that to the carbon tax, we're talking about an effect on inflation in the order of about one-tenth of one percentage point.

That seems to be a considerable difference in orders of magnitude in terms of the impact of the carbon tax on inflation versus the impact of oil and gas prices in a period when oil and gas companies are making record profits. It seems to me that one is decisively more contributory to inflation than the other. Is that a fair claim?

[Tiff Macklem]

Yes, I think your arithmetic is accurate.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much. I appreciate that.

I am curious to know this. I know that at various times the bank has pronounced on the wage expectations of workers and the effect that you believe that has on inflation. I don't believe there has been a statement—I look forward to being corrected on that if I'm wrong—about price increases by companies over and above their increases in costs, which is why, in a number of sectors, we are seeing record profits. I've talked about oil and gas. I think there are about 15 sectors overall that have seen extraordinary increases in their profits.

Can we expect a statement from you at any time soon about the role those extraordinary price hikes are playing in inflation?

[Tiff Macklem]

Well, I can speak to it right now.

What are we seeing? If you look at corporate profits, as you indicated, particularly in the energy sector, with much higher global energy prices over the last year, we have seen higher profits in the energy sector. If you look at it more broadly, and this goes a bit to the previous question, what we have seen is that...and I would say that we have learned something from this. What we saw was that with the economy in excess demand, when there were cost pressures, businesses passed those through very quickly to final consumers, and this unfortunately is a symptom of an overheated economy.

When an economy is overheated, when inflation is high and when people see prices of everything going up, it makes it easier for companies to raise their prices, because people can't tell: Is this a generalized increase or is it just this company raising their price?

What we've seen is that, yes, the distribution of price-setting behaviour of companies changed. Price increases were bigger. They were more frequent.

We are starting to see it normalize, and that process of normalization is one of those key things we're watching to evaluate whether we have raised interest rates enough to get inflation back to target, and if we don't see it continue to normalize, we will need to do more.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

If you feel that it's warranted to say to workers that they should limit their expectations around what they take in, in exchange for what they offer, doesn't it stand to reason that a similar missive is due to corporate Canada? Say they should be mindful in their price setting that they don't trigger an inflationary spiral, because they also have the ability to impact expectations of inflation in the way that they set their prices?

[The Chair, Liberal, Peter Fonseca]

Give a short answer, Governor, please.

[Tiff Macklem]

I think that's what I was just saying. Companies need to normalize their pricing behaviour. That's part of getting back to 2% inflation.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you.