"Getting inflation all the way back to 2 percent will take some time. We also know there could be bumps along the way," said Carolyn Rogers, Senior Deputy Governor of the Bank of Canada.
The Bank has delivered both the largest cumulative rate hike, 300 bps in 2022, and the highest policy rate, 3.25 percent, but it won't stop or suspend rate hikes while inflation continues to rise across goods and services.
Inflation won't come down overnight. Monetary policy works like a chain reaction or sequence of events, which takes time. According to Rogers, changes to the Bank's policy rate affect different households and sectors of the economy differently and at different speeds.
The housing market is one sector where higher rates are felt immediately, but it takes longer for interest rates to bring down price growth on things not directly tied to borrowing, she said.
The recent declines in gasoline and other commodity prices have helped to lower headline inflation from its peak in June. However, the core inflation, which excludes food and energy, continued to rise.
TD Bank Economist Ksenia Bushmeneva said the past surge in goods prices and healthy wage gains have passed through to service prices.
"Services prices are stickier. They lag goods' prices in that they take longer to rise, but once they begin to accelerate, they can continue to increase even in an economic downturn. This raises the risk of a longer period of high inflation despite slowing growth," Bushmeneva said.
Rising wages are also adding more fuel to core inflation. Even as the labor market cooled further in August, wage growth continued to accelerate, with average hourly wages up 5.4 percent from a year ago, he said.
BMO Chief Economist Douglas Porter said the core inflation has flared to 6.6 percent year on year from just 2.8 percent a year ago. A weaker currency could further fuel consumer goods and imported food prices.
"The sag in the loonie threatens to aggravate an already problematic inflation backdrop," Porter said.
The steady stream of fiscal support measures flowing from both the provincial and federal levels would, on balance, nudge the risks of higher rates a bit further upward, he added.
Last week, the federal government announced a targeted support package totaling more than 4.5 billion Canadian dollars (3.6 billion U.S. dollars).
Derek Holt, Head of Capital Markets Economics at Scotiabank, said the package was deliberately timed to hit accounts into the holiday shopping season, which means it was meant to be spent.
"It is equal to about 8 percent of monthly retail sales, through the likely impact will be more spread out than across just one month and will also spill into services like spending at restaurants and bars," Holt said.
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