Macklem: refinery damage lifts fuel prices beyond what oil alone explains
Victoria Shinder2 min readBank of Canada Governor Tiff Macklem, speaking to the Halifax Partnership on 21 September, set out why the Bank's inflation problem is not only about the price of crude.
Normally, he said, every 10 percent rise in oil prices adds about 0.2 percentage points to CPI inflation. This time damage to global refining capacity has pushed petrol and diesel costs up further, so recent petrol prices have been consistent with an oil price almost US$40 higher than where it has actually been. CPI inflation has stayed around 3 percent in recent months, mainly because of fuel, and if oil stays near US$100 a barrel the Bank expects it to edge up in the coming months. The Bank has so far looked through the direct effect, he said, because it has seen little evidence of the costs spreading to other goods and services, but with shipments from the Middle East still curtailed the risk of broader, more persistent inflation has increased.
On the other side is trade. Negotiations with the United States have broken down and new US tariffs cover products worth about 5 percent of Canada's goods exports to the US. Macklem expects no large direct effect on the overall economy but warned that renewed uncertainty could push businesses back to delaying investment and hiring, after a second quarter in which non-energy exports rose 14.5 percent and business investment grew at an annualized 8.8 percent.
Governing Council left the policy rate unchanged earlier in September. Macklem said the Bank does not want to raise rates and restrain growth if inflationary pressures are contained, nor to be too slow if they are becoming more persistent. He also said a new forecasting model, Prima, built to distinguish temporary from persistent inflation pressures, will be the Bank's primary model for the October Monetary Policy Report.
What it means
The refinery point is the useful detail. A central bank that looks through an oil shock is looking at crude; if the bottleneck is refining, the pass-through to consumers is larger than the usual rule of thumb and harder to model. Macklem's two-sided wording keeps both options open, but the announcement of a new model aimed precisely at persistence tells you which question the October report will be built around.