Scotiabank hangs inflation spike on global, foreign affairs

A new Scotiabank inflation report warns that more than half of the cost increases observed in Canada reflect global supply challenges, affecting inflation expectations and monetary policy.

Through its macroeconomic forecasting model, which has been used to determine the cause of the increase in inflation since the end of 2019, Scotiabank reports that 50% of the increase in inflation over the past two years can be “attributed to global or foreign affairs.

“These include US inflation, commodity prices and exchange rate fluctuations,” the report reads.

In addition, the report said supply challenges largely reflect developments at the global level accounting for another 35% of the increase in inflation.

The report also mentions financial support packages issued by the federal government as a response to the pandemic, such as the Canada Emergency Response Grant, the Canada Recovery Allowance and the Wage Allowance. Canada, together increases the output gap – that is the difference between what an economy actually produces and what it would produce in an ideal world – by about 1.3 percentage points, “implies that the excess demand we see now in Canada would not have existed without these supports.”

The report adds that pandemic assistance programs for businesses and households are driving excess demand across the country.

Without these supportive measures, Canada would still be oversupplied, the report said.

As any increase in the output gap accounts for less than half a percentage point of the increase in inflation since the end of 2019, Scotiabank said it accounts for 125 basis points of the total tightening that the Bank Canada is expected.

“We estimate that as much as 125 basis points of the total 400 basis point increase we are currently expecting (from 0.25% at the start of the tightening period to the expected end point of 4, 25%) is in response to pandemic support measures.”

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