Bank of Canada Governor Tiff Macklem says structural changes in the global economy are creating powerful headwinds that could make inflation more volatile and harder to control.

“The structural tailwinds of peace, globalization and favourable demographics are turning into headwinds, and the world looks increasingly prone to shocks,” Macklem said Aug. 26 in Mexico City. “Elevated sovereign debt, slower economic growth and lagging productivity also make our economies more vulnerable. These vulnerabilities are compounded by intensifying geopolitical risks and more frequent climate events.”

Macklem singled out rising trade tensions as a growing risk for Canada and Mexico. “On top of these structural shifts, the rules of global trade are being overturned. Steep new U.S. tariffs and the unpredictability of U.S. policy have reduced economic efficiency and increased uncertainty. As the United States’ biggest trading partners, Mexico and Canada are particularly affected.”

Those developments could add pressure on prices. “Headwinds that limit supply could mean more upward pressure on inflation going forward. And more frequent supply shocks could mean more variability in inflation.”

Policy limits

Macklem stressed that monetary policy has limits in such an environment. “Unfortunately, monetary policy cannot undo the economic impacts of the structural shifts ahead. Nor can it offset the hit to efficiency from higher tariffs and the reconfiguration of trade. And we can’t reduce the uncertainty caused by the policies of other countries or by shocks that are outside our control.”

Instead, the central bank is adapting its models and communications to manage uncertainty. This includes increasing the use of non-traditional data and surveys to better understand how businesses and consumers are adapting to structural change and shifts in U.S. policy. Macklem noted that new sector-focused models are being developed after older frameworks failed to capture inflationary bottlenecks during the pandemic.

On the Bank’s inflation-targeting framework, which will be reviewed in 2026, Macklem said the 2% target will remain central. “The 2022 spike in inflation was a painful reminder of just how much Canadians don’t like high inflation. We also know that Canadians generally understand and support the 2% target. That familiarity has helped anchor inflation expectations through thick and thin,” he said. “In short, the 2% target has proven its worth in achieving price stability over time. We are already facing a more uncertain and unpredictable world. Now is not the time to question the target.”