Such behaviour, known as “rational inattention,” likely reflects the economic environment in Canada, where inflation has been low and stable over the last 25 years.8 All this being said, the gap between Canadians’ expectations of inflation—and this includes those of consumers, firms and market participants—and our inflation target has been relatively small.
The link between output and inflation is determined by three main factors: external shocks to prices; the size of the output gap and its impact on inflation; and the extent to which current inflation feeds into price and wage setting. In different ways, each of these factors has been relevant for the delayed reaction of inflation to the recovery.