Why it is so hard for the Bank of Canada to crush inflation

Those who think central bankers are powerful and manipulative might ask themselves why people like senior deputy governor Carolyn Rogers don't just snap their fingers and make inflation go away.

The Bank of Canada officials have declared they will be "resolute" in crushing inflation, squeezing it down to the bank's two per cent target range. But that process may be long and painful as rates keep rising.

Even as Rogers warned on Thursday that Canada faces an "expectations spiral," trying to change the direction of inflation is akin to turning the Titanic after you've spotted an iceberg through the fog.

Economy is too strong

Not that the Canadian economy is anywhere near sinking. Instead, the problem laid out by Rogers is one of an economy that is simply too strong.

"Demand continues to outstrip supply in many parts of the Canadian economy and short-term inflation expectations of Canadians remains high," said Rogers to Calgary Economic Development, a privately and publicly funded agency.

The solution, said Rogers, was to use a sharp rise in interest rates to crush demand, offering supply a chance to catch up.

As the European Central Bank also announced Thursday, the plan is to do what they call "front loading," several large hikes in interest rates in a row quickly to shock the market. It's an attempt to "avoid the need for even higher rates down the road and the more pronounced slowing of the economy that would go with it," said Rogers.

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