Understanding the strongest influences on short-term inflation could inform effective federal bank policy. Post-Keynesian financial system theory predicts a positive relationship between issuance of household credit and said short-term inflation. This project uses a cointegration technique and a vector error correction model (VECM) to examine causality between short-term private, non-financial sector credit and short-term inflation in Canada. Demand-pull inflation is likely to be a contributing mechanism in short-term inflation, implying a need for further regulation of the total household credit to GDP ratio.
