Former Bank of Canada governor Stephen Poloz believes there’s a path for the central bank to tamp down sky-high inflation without crushing economic growth, so long as Tiff Macklem and company operate with a deft touch.

In an interview Thursday, Poloz – now a special advisor at law firm Osler – said that while there will be some painful side-effects to the inflation fight, a combination of prudent policy and consideration of the transitory inflationary effects of the war in Ukraine, could lead to a scenario where price pressures continue to abate without sending the domestic economy into a deep funk.

“It would be nonsense to crush inflation down to two per cent immediately since some of it is going to go away by itself, obviously it would be nonsense to just ignore it and hope for the best,” he said. “So somewhere in the middle is that sort of stagflationary some-of-this, some-of-that path, and there’s no painless way to get there because what has happened in Ukraine.”

Inflation has moderated from its June high of 8.1 per cent year-over-year; it did run at a 6.9 per cent pace in September – more than three times the Bank of Canada’s two per cent target.

That decline has largely been due to moderating gasoline prices, with the average of the three core measures – which strip out volatile items like gas and groceries – holding steady at 5.3 per cent in the month.

Digging deeper, grocery prices rose 11.4 per cent in September, the fastest pace since 1981.

While Canadians have been adjusting their spending habits – the Bank of Canada’s latest survey of consumer expectations showed more than 80 per cent of Canadians are taking actions to cope with higher inflation – Poloz said there are other factors at play when it comes to businesses adjusting their behaviour in ways that should prove disinflationary.

“There are some mechanisms affecting inflation that people aren’t really talking about, like how much less disposable income people have. Walmart results – they had a lot less stuff in the basket,” he said.

“What’s Walmart’s response? They’re going to slash prices: that’s what disinflation looks like, it’s not about crushing the economy. So I think we have a lot of those preconditions there that are helping.”

The prospect of more outsized rate hikes has led to a growing chorus of calls that Canada will enter a recession next year. Earlier this week, Scotiabank said it expects a technical recession – two consecutive quarters of negative economic growth – in 2023, and that the Bank of Canada will ultimately have to raise rates by another full percentage point by year’s end.

While Poloz did admit a recession of some type is the most likely outcome for the domestic economy, he said that underlying strength in the labour market should soften the blow and make such a drop in economic activity feel like more of an adjustment to more normalized conditions.

“It does look [like a recession] from where we’re sitting, but it’s not necessarily the case: I’ve got to admit there’s a grey zone there. I think of it more as an altitude adjustment: the plane got up to 40,000 feet by mistake, we really were supposed to be at 35,000 feet – too much turbulence up here,” he said.

“So let’s get it levelled off at a sustainable altitude of 35,000 feet. Do we have to go down to 30 for a while to get back to 35? Possibly, but it’s not going to feel like much of a recession if that’s what happens: the labour market is super strong, the economy is strong.”

Though central banks around the world are walking something of a tightrope as the pandemic recedes, Poloz said from his vantage point, policymakers are largely doing a good job.

"They’re on the right path, they’re doing the right thing, or course they are. We just don’t know – nobody, including them – when we’ll actually get there. It will be real-time discovery.”