How did the Bank of Canada get inflation so wrong? One explanation for the misjudgment – like many central banks – is that they took their eye off of tightly managing the money supply. With inflation now well above the 2% target, last week’s whopping 1% policy rate increase – not seen since the 08/09 Great Financial Crisis – caught most of us off-guard. Tom Keene, with Bloomberg Surveillance is calling it the biggest shock of the week, leading to the opening of the flood gates.
Steve Ambler and Jeremy Kronick took a look at the data (link). They found evidence that there is still a valid and reliable relationship between the long-term trend in money supply growth and inflation – arguing (link) that unprecedented money growth during the pandemic is still fueling high inflation.