Canadian inflation is seen as unlikely to return to the central bank's 2% target until 2024 after peaking in June. In addition, less volatile factors such as wages and rent replace energy as the main source of price pressure, analysts said.
In an effort to return inflation to target, since March the Bank of Canada (BoC) has raised its benchmark interest rate by 225 basis points to 2.50%, including a full percentage point move in its last policy decision in July. It was also the only increase by a G7 country in the economic cycle.
Expectations of a slow fall in inflation to return to target could make the central bank less willing to turn to interest rate cuts next year if the economy moves into recession as some analysts expect.
Earlier this month, analysts expected the central bank to cut rates as early as March next year.
"Even with the economy likely to experience a moderate recession next year, we think it will take until 2024 to get inflation back to target, or close to it," said Josh Nye, senior economist at Royal Bank of Canada.
The Bank of Canada's latest forecast, in July, was for inflation to return to 2% by the end of 2024.
Canadian inflation started to slow to 7.6% in July on lower gasoline prices, down from a near 40-year high of 8.1% in June, but a measure of core price pressures that strips out the most volatile components, such as energy, continued to rise.
Increases in slower-moving drivers of inflation such as wages and rents are likely to continue, even as rising commodity prices and some supply constraints caused by the COVID-19 pandemic and the Ukraine war ease, analysts said. .
Investors appear to have taken note, with money markets now expecting the central bank's benchmark interest rate to peak at around 3.75% in the first quarter of next year and remain close to that level until almost 2023.
The Federal Reserve may also face the same issue of bringing inflation back to target. Yet it has the advantage of strong employment and price stability, unlike the singular goal of low inflation pursued by Canada's central bank.
