Business·Analysis

Bank of Canada governor hints he will raise interest rates even if he doesn't have to: Don Pittis

Bank of Canada governor Stephen Poloz told his fellow central bankers gathered at Jackson Hole, Wyo., this past weekend that "the fourth Industrial Revolution" is making the central bank's data harder to read in an era of "augmented uncertainty."

In Jackson Hole speech, Stephen Poloz says 'digital disruption' makes data hard to read

Mortgage costs could be going up as central bank governor Stephen Poloz hinted this weekend that he will raise rates to avoid 'falling behind the inflation curve.' (Jonathan Hayward/The Canadian Press)

Disruption caused by digital technologies is making the job of central bankers harder.

That was the essence of a speech by Bank of Canada governor Stephen Poloz at this weekend's annual shindig for central bankers in Jackson Hole, Wyo.

In a speech titled "The Fourth Industrial Revolution and Central Banking," the governor hinted at an interest rate hike.

Digital disruption is making data harder to read, and what Poloz described as "augmented uncertainty" may mean he will lift interest rates even though he strictly doesn't have to.

Falling behind the inflation curve

As the central bank governor has said repeatedly in the past, the Bank of Canada is doing its best to base its interest rate decisions on the data it collects each month. The goal has been to raise rates gradually, when the data indicates it's a must.

But Poloz said the central bank must play it safe in a fast-changing world.

"Importantly, this approach does not mean keeping interest rates unchanged until inflation pressures emerge," he said in his weekend presentation at the Kansas City Economic Policy Symposium.

"That would virtually guarantee falling behind the inflation curve."

Poloz warned that in a fast changing world, central banks must struggle to adapt. (Justin Tang/Canadian Press)

With Canadian inflation roaring ahead at three per cent, on the surface it would seem Poloz would be anxious to hammer that number down by sharply increasing interest rates.

But that is not what the data is telling him. While generalized inflation may indeed be around the corner, that three per cent rise in prices is not what it seems. 

As Poloz said in an interview on U.S. television Friday from the Jackson Hole event, the recent surge in inflation was due to "transitory factors."

The three per cent inflation figure that hit the headlines earlier this month is only one of four such measures the bank uses to set its rates. And as a guide to setting rates, it is not the most important.

Inflation feels higher 

The bank uses additional inflation indicators that try to measure the background level by removing some of the noise of sudden price swings in things like gas pump prices. (For those interested in a more detailed explanation, see this 2017 column published shortly after the three new core measures were introduced.)

Essentially, the core measures calculated by Statistics Canada and graphed over many years are an attempt to understand the actual inflationary trend. And those core measures show that inflation is right in the middle of the bank's target range. Unless that changes, Poloz is under no obligation to raise rates. 

In Twitter comments following the release of the latest inflation data, I saw several outraged remarks that said that the three per cent figure actually underestimated the level of inflation consumers were experiencing in their daily lives.

People complaining about the accuracy of inflation figures may not be just whiners.

Those who do a lot of driving in gas-hungry trucks, for example, would spend a bigger proportion of their income on fuel and, as gas prices rose, they would notice a larger than average hole in their finances.

When gas prices are rising, people who drive big vehicles long distances will notice a bigger inflationary impact than national figures indicate. (CBC)

And as I've noted in the past, improving technology for things like cellphones and big-screen TVs goes into the cost-of-living calculation as a fall in prices, even if doesn't seem like it.

Angry tweeters are not the only ones critical of the way central banks measure inflation. Experts find plenty to dislike about the accuracy of inflationary measures in both Canada and the United States. But in an age when so many things are attributed to conspiracy, mismeasuring inflation is not a plot.

Apples to apples

Instead, by using a consistent set of statistical measuring tools, even if they aren't quite right, central banks are able to compare like with like — apples to apples, so to speak. They are watching the pattern as the same set of variables change over time. 

But on the other hand, as Poloz clearly described in his weekend speech, in a world where technology is changing the way we do so many things, we have little choice than to admit our carefully collected and analyzed data is only an estimate.

Poloz was far from gloomy about a future of technological change but in a fast-moving world, important assumptions in our models may no longer be correct.

Using a consistent data set in a tried-and-true model allows the Bank of Canada to compare apples to apples, but in a fast-changing digital world the models are imperfect. (Bobby Yip/Reuters)

He cited the Amazon effect as an example, where a single retail giant is single-handedly holding prices down in a way that may conflict with existing inflationary understanding. Conventional measures of exports and imports may have been skewed by cross-border digital supply chains. And a connected digital world may also be driving up the supply of new digital goods and services faster than we realize. 

"As with all major supply shocks in the past, it could take a long time for us to truly understand what is happening," said Poloz.

Follow Don on Twitter @don_pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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