The Bank of Canada has shown remarkable insouciance regarding its ongoing failure to meet its inflation target, despite affordability becoming the number one concern for Canadian households. Consumer prices rose 3.2% in May, continuing a pattern of overshooting the central bank's two per cent target. Since 2020, the Consumer Price Index has increased by 26.9%, far exceeding the 15% that would have occurred if the bank had achieved its goal. Prices surged eight per cent in 2021 alone and have remained above target ever since.
Bank's Complacency Despite Persistent Overshoot
The bank appears unperturbed by its inflation miss. In its January 2026 Monetary Policy Report, it was essentially self-congratulatory about almost returning inflation to target, stating that "CPI inflation remains near the two per cent target." The report added that "measures of core inflation that exclude volatile components, including food, continue to ease" and "most cost indicators are now rising at a pace broadly consistent with inflation around two per cent." Its benign outlook was partly based on the assumption that "oil prices are assumed to be lower" — an assumption almost immediately invalidated when prices jumped after the onset of war in Iran. The prospect of sustained high oil prices promises another year of above-target inflation, both directly through gasoline and home heating oil and indirectly through rising input costs for air transport and food.
Impact on Essential Goods and Household Budgets
Higher prices for essential goods and services — food, housing, health care, and gasoline — have been especially painful. Since 2021, the cost of these items has risen 39.8%. In the first quarter of this year, households allocated 47% of their spending to these essentials, almost three percentage points more than before the pandemic. This leaves less money for discretionary spending on durable goods, entertainment, travel, and restaurants.
The bank dismisses repeated overshoots as the result of one-off events, including wars in Ukraine and the Middle East and supply chain disruptions from the COVID pandemic. However, former deputy governor Carolyn Rogers, in her March 2024 "breaking-the-glass" speech, attributed stagnation of real incomes to faltering productivity but ignored the contribution of above-target inflation.
Calls for Accountability
It would be a refreshing display of candour if the bank openly acknowledged its failure to control inflation, reaffirming its commitment to the two per cent target. In his first press conference, new U.S. Federal Reserve Board chair Kevin Warsh admitted the Fed's miss, saying, "We've missed for five years, and we're going to fix that." Yet the Fed still doesn't project inflation returning to its target until 2028, implying a seven-year overshoot.
Watching central banks in both Canada and the U.S. exceed their targets year after year, it is hard not to agree with Mohamed El-Erian, former head of PIMCO and now president of Queen's College, Cambridge, who says central banks have unofficially decided to raise their inflation target to help governments reduce the burden of huge debts assumed during COVID.
