There is no two ways around it, inflation is rising and will continue to do so in the near term, said TD.
A doubling in oil prices, a 30% increase in diesel prices and shortages in jet fuel are filtering into the prices consumers pay, noted the bank. That's just the beginning.
Right now, countries are mostly seeing first-order effects on prices directly tied to these products, but the impact will broaden to second-order effects within broad production and transportation supply chains, TD pointed out.
There are several key distinguishing factors today versus 2022, stated TD. Although energy prices are surging and supply chains are snarled, the magnitude and scope on goods and services is to a far lesser extent compared with 2022.
In addition, this cycle lacks the "revenge spending" boom that accompanied the reopening of global economies that were fueled by excess pandemic-era savings. Lastly, labor demand is much weaker than post-pandemic, when firms were under pressure to quickly rebuild workforces to meet surging demand. This means far fewer people are switching jobs in search of higher wages, which pressured employers to pass along those costs to consumers.
The bank expects the oil supply shock to boost consumer price index inflation to average 3.6% and 2.7% in the United States and Canada, respectively, this year. Markedly higher than the 2.8% and 2.2% projected last December.
However, the bleed-through to core prices should be more muted than in 2022, with the demand side of the equation in a very different place, said TD.
Lastly, central banks will be more reactive this time around to quell runaway prices. The pandemic was a once-in-a-century economic disruption, whose effects weren't well understood. The word "transitory" frequently described the jump in inflationary pressures, which proved incorrect, added the bank.
The lens of central banks was also blurred by a decade of weak inflation that pre-dated the pandemic and created a bias towards a "wait-and-see" approach to inflation.
With their credibility subsequently undermined, policymakers won't want to make the same mistake again, according to TD. Many are already sending clear signals that rate hikes will be in the queue if the energy shock doesn't dissipate. Central banks will set a lower ceiling on what they are willing to tolerate in inflation compared with in 2022.