Bank of Canada Governor Mark Carney worries about what you think.

In fact, figuring out how you view the Canadian economy and whether you believe that the Bank of Canada is serious about tackling rising prices is the best tool he has for preventing this economic scourge from taking off.

The process is known as managing expectations.

And, for the past decade and a half, it has proven to be a pretty effective way of squashing inflation in Canada.

This strategy also means, however, that Carney might be very quick to react with higher interest rates if he thinks the bank's credibility as an inflation fighter is in question.

The Bank of Canada building in Ottawa. (Fred Chartrand/Canadian Press)

"Expectations play a big role in what the bank is trying to achieve," said Douglas Porter, an economist with BMO Capital Markets Economics.

Tough-guy economics

Convincing Canadians that the Bank of Canada will be hard on inflation is kind of like trying to be the toughest guy in a bar. It only works if everyone else thinks you are tough as well.

In the case of the Bank of Canada, Carney has to ensure that Canadians believe he has inflation — defined as the rate of increase in the price of a basket of goods — under control.

If he is credible, workers will not go out and ask for more money, companies will not try to pass along higher prices to consumers and investors will not seek out higher returns for interest-bearing investments.

If Canadians do not think the bank is serious about battling price increases, however, they will ignore what Carney says publicly and, instead, start demanding more money for their work or their products.

Public school support staff picket in Calgary. (CBC)

Once that process begins, inflation has a tendency to spiral to very high levels.

"You get a wage-price spiral," said James Marple, an economist with TD Economics.

Back in the early 1980s, Canada saw the annual inflation rate rise above 10 per cent. A major reason was that workers kept asking for more money in order to keep pace with previous price hikes.

At that time, what the Bank of Canada did had little effect on the behaviour of Canadians.

No spiral this time

Carney wants to stop this self-fulfilling inflation spiral before it gets a full head of steam.

He has a few tools at his disposal in this fight, including public statements and private chats with various business leaders.

But Carney's main weapon is interest rate hikes.

Essentially, the Bank of Canada can decide to boost borrowing costs a little bit now to show people that the central bank is not afraid to hike rates to slow inflation later.

But making the correct guess at when and how hard to apply the monetary brakes to the economy is an art, not a science, according to economists.

"(Making the proper decision) is a difficult thing to do," Porter said.

So far, the bank's strategy has worked. A soft foot on Canada's interest rate pedal has kept prices from rising very fast without stopping economic growth.

According to Statistics Canada, the annual inflation rate has not topped three per cent in 16 years, a very good performance by international standards.

The question as prices rise is whether Carney will have to push up interest charges higher in order to make sure Canadians believe him.