Higher for Longer Structural Inflation and Real Rate Trends in the 2020s

  • James K. Stewart, Executive in Residence, Global Risk Institute
Trade and stats backdrop


Financial markets are understandably focused on the next steps for the Bank of Canada (BoC) as it continues its conditional pause after 425 basis points (bps) of rate hikes, and the US Federal Reserve (Fed) as it continues with rate hikes after 450 bps of increases. Headline inflation in both countries is well below its mid-2022 peak but remains far above 2% despite decelerating faster in Canada and with a mixed picture in the US. Economic growth has slowed, yet labour markets remain robust in early 2023. Examining the structural trends in inflation and real (inflation-adjusted) interest rates is timely for setting future policy. Surging prices in 2021 and 2022 resulted from cyclical forces, global shocks, policy stimulus, and secular factors. This paper explores an array of secular drivers putting upward pressure on inflation and real interest rates. These longer-term, slower-moving factors create an upward bias to inflation and real rates during 2023- 2026 and, potentially, beyond.