Macklem: No Evidence Inflation Spread Beyond Oil Shock
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- Tiff Macklem warned in a Paris speech to the Chambre de commerce France-Canada that chronic US trade deficits funded by foreign capital, China's export dependence, and Europe's weak investment are together building worldwide financial stability risks
- Macklem identified two specific risks: capital misallocation stretching US equity and credit valuations, and a sudden reversal of inflows that would send stress well beyond American borders
- The Bank of Canada Governor flagged that cross-border capital flows are now dominated by non-bank entities — hedge funds and private equity — that are "less regulated, less transparent and less tested under stress"
- Macklem pointed to encouraging signs: China's latest five-year plan emphasizes domestic consumption, Europe is moving toward continental integration and defence investment, and the US has aspirations to lower its fiscal deficit
- Statistics Canada reported annual headline inflation of 3.2% in May, driven by rising oil prices, while core inflation measures remained near the central bank's 2% target
- Macklem said the tentative US-Iran peace agreement and the reopening of the Strait of Hormuz to oil tankers "certainly takes some upside risks away on inflation"
Why it matters: The 3.2% May headline is an oil story, Macklem says, and core near 2% means the Bank of Canada won't be forced to hike. His bigger worry: US markets are gorging on foreign capital, and a sudden reversal would hit far beyond American borders.
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