Bank of Canada Deputy Governor:Corporate Price Increases In Part Driving Inflation

© Reuters.

By Ketki Saxena

Investing.com -- Bank of Canada deputy governor Nicolas Vincent said that price increases by corporations is partly to blame for stronger-than-expected inflation, driving the Bank of Canada to rethink its assumptions about the drivers of inflation. 

"We believe that this behaviour by firms – both here and abroad – is intimately linked to the stronger-than-expected inflation we’ve seen," Vincent said in a speech to the Chamber of Commerce of Metropolitan Montreal.

He also attributed corporate price increases as "Part of the reason why the models that central banks use haven't fully captured the recent effects of supply-demand imbalances on inflation."

"The most commonly used models weren’t built to capture a change in a firm’s behaviour."

Vincent also noted that these abnormal price increases, which have been more frequent since the pandemic, have forced the BoC to "to revisit some of the assumptions we make in our economic models as well as question the relationship between inflation and its drivers". 

Recent research from the Bank of Canada shows that price increases follow the cost increases faced by businesses, but the Deputy Governor noted that the price increases may not be transitory and in fact become "self-perpetuating" as inflation expectations become entrenched. 

"Firms might continue to make larger and more frequent price changes even when many of the factors driving those changes have gone away", Vincent noted. "Perhaps the biggest risk of all is the idea that recent pricing behaviour could become self-perpetuating." 

"If you continue to expect your suppliers and competitors to make frequent price changes, you might be more prone to do the same yourself, creating a feedback loop." 

Corporate profits and price increases have driven widespread criticism recently, as critics - such as the NDP - rally against the concept of high profits amongst soaring inflation, and as the Liberal government strong-arms grocers into stabilizing prices, or facing consequences.