Macklem wrote that he and his team had underestimated the inflationary risk posed by the combination of supply shocks and elevated consumer demand during the COVID-19 pandemic
The surge of inflation over the past three years has been a “stark reminder” that central banks can’t always ignore supply shocks and hope price increases stabilize on their own, Bank of Canada Governor Tiff Macklem wrote in an essay published last week as part of a broader soul-searching effort by some of the world’s top central bankers.
They have also begun thinking about how to improve monetary policy making going forward, while wrestling with the after-effects of the most rapid and co-ordinated interest-rate hiking campaign in a generation. Mr. Macklem’s essay focuses on the Bank of Canada’s forecasting errors and why it waited until early 2022 to start raising interest rates despite fast-rising inflation – something he and his colleagues now see, in retrospect, as a mistake.
That proved to be a serious miscalculation. The supply shocks percolated through the economy, mixing with overheated demand that was fuelled by government support cheques, ultra-low interest rates and a shift in consumer spending patterns.
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