While headline inflation is “easing relatively fast,” over the next few months it’ll become more about just how sticky inflation proves to be and how far it will drop below three per cent, according to a former Bank of Canada economist.

On Wednesday, the Bank of Canada held its key policy rate for the first time in nine meetings.

Charles St-Arnaud, chief economist at Alberta Central and a former economist at the Bank of Canada, said this decision was in-line with economists’ expectations but “the risks are probably still tilted to another hike if inflation doesn’t moderate the way they want to see.”

“What I thought was interesting is that they’re probably listing a bit more upside risk in their scenario,” St-Arnaud said in a phone interview on Wednesday.

He added this could be a difficult environment for the Bank of Canada to navigate, with growth and inflation stronger than expected in the U.S. and Europe, a rebound in China creating upside risk on commodity prices, and elevated wage growth.

When it comes to inflation, while the headline figure eased in January and rose 5.9 per cent compared to a year ago, than economist expectations, St-Arnaud said the central bank would want to see that number fall further.

“The Bank of Canada would want to see it [inflation] below three per cent to start to feel a bit better, so I think they're seeing encouraging changes in the right direction but I think the worry is maybe core [inflation] will be stickier over the next few months.”


The former Bank of Canada economist flagged that the tightness in the labour market could start to become a real issue for the Canadian central bank due to strong wage increases.

“They referenced that they expect wage growth to decelerate in the coming months, so they will want to see that happen and they will also want to see the dynamic in core inflation further ease, consistent with their target,” St-Arnaud said.

Last month, Statistics Canada reported the average hourly wages rose 4.5 per cent in January, down from 4.8 per cent in December.

In February, Bank of Canada Governor Tiff Macklem said wage growth in the range of four and five per cent will not help get inflation back to the two per cent target, unless productivity growth is strong.

St-Arnaud said if we don’t see strong wage growth start to ease, then it might force the Bank of Canada to start hiking once again.

“I think it [the central bank] will need to start to see wage growth start to ease,” he said.

"Also as the impact of previous rate hikes starts to fade, the impact from them is no longer as strong as they were seeing, the risk is clearly that they could hike again between now and July if we don’t see that easing.”


While “headline inflation is easing relatively fast” and the “Bank of Canada says we’ll probably be close to three per cent by the summer,” St-Arnaud said it’s important to watch underlining data in core inflation and wages.

“It’s easy to see that [inflation around three per cent] and think, ‘Oh the job is done now,’ but it’s more about how sticky inflation will be and whether we can bring it below that three per cent,” he said.

“Over the next few months headline inflation will bring a really positive tone, but we will need to be looking closer at underlining data from both core inflation and wages in order to get a real preview of what the Bank of Canada will do.”