Dissecting Canada's -- and the world's -- inflation woes

Inflation woes aren’t unique to Canada. In fact, “Most industrialized countries have also posted very low inflation, suggesting that common factors are affecting price increases,” says a Desjardins economic report.

But what are these factors, and when will they dissipate?

“First, industrialized countries have all been impacted at varying levels by blips in energy prices,” says Desjardins. And secondly, “the Great Recession had major worldwide repercussions, leaving most industrialized countries with excess production capacity.”

And that’s not all. As the report notes, “Other theories have also been suggested to explain widespread weak price growth.”

Think about the impact of low inflation for a long period, says Desjardins, given “households and businesses have adapted to the extended period of low price growth in recent years.” Also, consider the impact of e-commerce activity and technological advances, says Desjardins, “which has sharpened competition” and “which could improve productivity in ways that are difficult to measure.”

Read: Your guide to inflation-proofing clients’ lives

So the future for Canada and its global peers is uncertain.

Still, Desjardins is optimistic. The bank forecasts “factors affecting global inflation could very well continue to be felt for several more years,” but it also says “the gradual dissipation of excess capacity in Canada could help turn the situation around in the next few quarters.”

If deflationary pressures pull back and real GDP keeps exceeding expectations, domestic prices may see some pressure. Says Desjardins: “In these conditions, it is reasonable to believe that, in the next few months, the annual inflation rate could accelerate in Canada, closing in on the BoC’s target median (2%).”

And this could lead BoC to continue hiking. However, “there is a delay between changes to the target for the overnight rate and their impact on inflation,” says Desjardins. “Therefore, the BoC must consider the level inflation will reach in the next 18 to 24 months when the time comes to make a decision regarding its key rates.”

Read: Why central banks should lose the loose money

Desjardins isn’t the only bank watching inflation closely. In mid-July, after the BoC hiked for the first time in seven years, CIBC, TD and RBC weighed in on the Bank’s action. CIBC suggested inflation could exceed 2% by next spring while RBC suggested another hike could come in October, followed by a pause in tightening.

Read:

Inflation to 2% within a year? It adds up, say economists

Don’t try to predict long-term rates