Business Brief: The inflation gap

Morning. The Bank of Canada held its key lending rate steady, citing geopolitical risks but reason for optimism.

Morning. The Bank of Canada held its key lending rate steady, citing geopolitical risks but reason for optimism. In focus today, we look at why the bank’s messaging might miss the financial reality of everyday Canadians.

Up first In the news Defence: Canada will announce next week it is taking an observer role in the Global Combat Air Programme, a joint initiative by Britain, Japan and Italy to develop a next-generation fighter aircraft. Travel: WestJet flight attendants’ vote to strike could ground August long weekend flights. Transportation: Canadian National Railway has halted freight rail operations in areas hit by wildfires after a video was posted online showing a CN locomotive surrounded by flames in Northern Ontario.

Here’s a screenshot from that video: In focus Why Canadians aren’t sharing the BoC’s optimism The Bank of Canada decided to hold its key lending rate steady on Wednesday, in large part because it can’t predict the outcome of the war in Iran. But Governor Tiff Macklem and Co. are facing a rising challenge at home.

The bank manages long-term economic stability by focusing on “core” measures of inflation, which strips out out volatile expenditures like food and gas. The bank isn’t equipped to anticipate the outcome of geopolitical clashes or supply chain pressures, which have driven up prices at the pump and in grocery stores. In its quarterly Monetary Policy Report, published alongside Wednesday’s rate announcement, the bank explained why it looks at underlying measures of inflation, which show that the oil price shock driven by the closing of the Strait of Hormuz isn’t spreading beyond gas and food.

Headline inflation rose to 3.2 per cent in May, mainly because of higher gasoline prices linked to the war in the Middle East, The Globe’s Mark Rendell reports. But the bank pointed out that inflation excluding gasoline, alongside other core measures, stayed close to 2 per cent. “This suggests that, so far, spillovers to the prices of other goods and services remain contained,” the bank said.

The disconnect According to a recent report by the bank, Canadians share a “widespread concern” that the inflation figures the bank favours don’t align with “real-life experiences.” “Canadians in all communities the Bank visited expressed concern with the cost of living,” wrote the