Commentary With prices soaring at the pumps and the checkout line, Canada’s inflation rate (measured by the Consumer Price Index) hit 5.1 percent in January, the highest rate since 1991. While the Bank of Canada raised its policy interest rate from 0.25 percent to 0.50 percent on March 2, the central bank may need to do much more to address current inflationary pressures. To some extent, central banks in Canada and other developed countries, after maintaining for months that emerging inflation primarily reflected transitory factors, have seemingly awakened to the unpleasant reality of a longer-run price stability problem. In fact, central banks may now be facing a perfect inflation storm. Simply put, inflation happens when the “aggregate demand” for goods and services in an economy exceeds the capacity of the economy to supply that aggregate demand at the current price level. Prices must rise to ration the excess of demand …
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