Long-Term Inflation May Be Slightly Higher

While most of the inflation surge should unwind, long-term inflation may remain slightly higher than normal, says Eric Lascelles, chief economist at RBC Global Asset Management. Speaking on ‘Where does inflation go from here’ at the ‘2023 PH&N Investment Perspectives’ educational seminar, he said it will likely end up at two per cent to 2½ per cent, above the sub-two per cent inflation target of recent years. An inflation target is important, he said. With a higher target, inflation becomes noticeable and behaviour changes which can result in economic growth being incrementally hurt. With a lower target – and true inflation is slightly lower than the CPI (Consumer Price Index) – there is a risk of being stuck in a deflationary spiral, downward rigidity could force more layoffs in a recession, and monetary policy has less room to maneuver with less capacity to stimulate the economy. A target of “two per cent works, it is good enough,” he said. Inflation spiked due to simultaneous shocks. The demand for commodities revived faster than expected, Russian sanctions impacted some commodity prices, and supply chain problems arose as preferences changed and demand revived quickly after lockdowns were lifted. Other contributing factors are that monetary stimulus, extreme interest rate cuts, and quantitative easing were left in place too long. As well, fiscal stimulus from unprecedented government spending remained in place beyond the time of acute need. However, he warned not to expect a full rewind as periods of high inflation are not usually followed by offsetting deflation.