Canadian Inflation Forecast Doubles For 2022, Near-Term Risks To The Upside: OECD

Elevated levels of inflation may stick around longer than central banks have let on. The Organization for Economic Co-operation and Development (OECD) released its 2021 summer outlook. The intergovernmental agency for advanced economies revised Canada’s inflation forecast higher. Not a little either, they now see double the rate of expected inflation next year. The agency further warns the risk is to the upside, potentially indicating more to come.

Elevated Inflation Is NOT A Global Story

High inflation isn’t the universal story presented in Canada and the US. Researchers observed elevated levels in just a few countries, such as Canada, the United Kingdom, and the United States. Other advanced economies, such as those in the EU and Asia, are suffering from low inflation. “…inflation expectations are still anchored, but near-term risks are on the upside,” says the OECD report. 

Canadian Inflation Forecast Revised Much Higher

Canada’s inflation forecast got a big revision higher, as the OECD sees more upside risk. In 2021, the agency now expects 3.1% annual growth to the consumer price index (CPI). This is an increase of 0.3 points from the previous forecast in May. A little lower than the headline of 4.1% last reported, implying it cools towards the winter.

OECD Headline Inflation Forecasts September 2021

Source: OECD.

The cooling doesn’t get inflation back to pre-pandemic levels though. In 2022, the forecast climbed to 2.8% annual growth, up 1.4 points from the previous forecast. Yup, the forecast rate of growth doubled for next year, after just a few months.

Inflation Risks Are To The Upside As Economies Re-Open

Elevated inflation problems might not end there, with the risks slanted even higher. Analysts warn if pent-up demand is higher than expected, prices will climb further. “Near-term inflation risks are on the upside, particularly if pent-up demand by consumers is stronger than anticipated,” the agency writes. 

Big factors behind the rise of inflation are commodity prices, shipping, and labor. Commodity and shipping prices tend to trickle into the cost of almost everything. The OECD expects this to continue to contribute to inflation through next year. They believe that will be true, even if the cost of those inputs don’t rise further.

Inflationary Wage Gains To Deal With Job Vacancies Can Make High Inflation Sticky

A labor shortage is one of the biggest problems with job vacancies soaring. This can lead to a wage squeeze, which is a non-productive increase in salaries. If non-productive wage growth boosts inflation further, they see less transitory inflation. It’s harder to roll back salaries than it is to pass on costs to consumers.

Is higher inflation still transitory? Sure. Everything is transitory on a long enough timeline. Elevated inflation for more than two years, with risks increasing, means it may not be a short-term issue.

The OECD suggests easy money policies should last as long as needed for recovery. Central banks should publicly communicate where they’ll draw the line though. If something isn’t very effective and hurting the public more than helping, it’s time to review whether macro tools are what’s needed.

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