Higher oil and gas prices may be permanent: former Bank of Canada governor

The Canadian economy may need to find a way to permanently adjust to higher oil and gas prices even when the cost of other goods start to fall, according to a former Bank of Canada governor.

In an interview Wednesday with CBC News Network's Power & Politics Stephen Poloz, who was the Bank of Canada governor from 2013 to 2020, said Canada's inflation rate may get back down to the official two per cent target in a year or two, but he struck a less optimistic note when it came to the higher cost of fuel.

"We might have to pay more for oil and gas forever," Poloz told host Vassy Kapelos. "And if that's the case, that's not inflation. It's a higher price that we'll have to pay and we'll adjust to that higher price somehow in our economy."

Earlier in the day Statistics Canada reported that Canada's inflation rate hit a nearly 40 year high of 7.7 per cent.

While the average cost of food items went up 9.7 per cent over the past year, it's the higher cost of gas — up 48 per cent compared to a year ago — that's the single biggest factor affecting the inflation rate.

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Poloz said the key question Canada's central bankers will examine in trying to manage inflation is how the high fuel prices end up affecting other parts of the economy.

"That is the part that is subject to control, and that is the part the central banks will be responding to, not the energy costs themselves," he said.

The bank has raised interest rates a number of times this year, citing inflation. The benchmark interest rate is currently 1.5 per cent.

The United States Federal Reserve recently hiked its benchmark interest rate 75 bases points to 1.75 per cent, its single biggest hike in decades.

Poloz said he expects the inflation rate to start ticking down in the latter half of the year, in part because of the Bank of Canada's tightening.

"I think people will be reassured by it," he said.

Some politicians and economists have criticized the Bank of Canada for waiting too long to raise interest rates as demand for goods and services recovered from COVID-19-related shutdowns.

But Poloz defended the bank's monetary policy, saying it was difficult to predict the effects of the Delta and Omicron variant waves on the economy.