Last week I attended a presentation sponsored by the Toronto CFA Society.  The topic was Inflation: Managing Assets in 2010.  The keynote speaker was David Wolf, former Bank of America and Merrill Lynch economist, who is now an advisor to the Bank of Canada.  He gave a good overview on the drivers of inflation and the criteria that the Bank of Canada uses to evaluate the Canadian economy.  Wolf stated the Bank of Canada believes that inflation will stay within its published target range of 2% for the foreseeable future.  He said that over the past 20 years inflation has remained in that range and he has confidence in the Bank’s ability to prevent higher inflation numbers.  Then he made a shocking statement, “if you believe that inflation will be above 2%, than you are making a bet that Bank of Canada will do a bad job”.

As you know, after a two hour presentation, it is hard to remember what was said.  But David’s comment stuck with me.  While I hardly feel that the Bank of Canada will do a bad job in the future, I question whether it will have the ability to control what we expect will be quite significant inflation.
While the Bank of Canada may have control over our economy, it can do nothing about the U.S.  The falling U.S. dollar combined with huge government overspending could stoke inflation much higher than 2% in the U.S.  No doubt U.S. inflation will spillover into Canada.  The other worry is China.  Here are two points that will blow your mind.  According to a McKinsey Global report dated March 2008, in 20 years, China will add more city dwellers than the entire U.S. population.   If China uses as much oil as the average American, the world will need seven more Saudi Arabias to meet demand.  The end result: demand from China for oil, copper, grains and other commodities needed to grow its economy will boost prices and impact inflation as well.