Morning. The Bank of Canada held its key lending rate steady, citing geopolitical risks but reason for optimism. In focus today, we look at why the bank’s messaging might miss the financial reality of everyday Canadians.

Defence: Canada will announce next week it is taking an observer role in the Global Combat Air Programme, a joint initiative by Britain, Japan and Italy to develop a next-generation fighter aircraft.

Travel: WestJet flight attendants’ vote to strike could ground August long weekend flights.

Transportation: Canadian National Railway has halted freight rail operations in areas hit by wildfires after a video was posted online showing a CN locomotive surrounded by flames in Northern Ontario. Here’s a screenshot from that video:

The Bank of Canada decided to hold its key lending rate steady on Wednesday, in large part because it can’t predict the outcome of the war in Iran. But Governor Tiff Macklem and Co. are facing a rising challenge at home.

The bank manages long-term economic stability by focusing on “core” measures of inflation, which strips out out volatile expenditures like food and gas. The bank isn’t equipped to anticipate the outcome of geopolitical clashes or supply chain pressures, which have driven up prices at the pump and in grocery stores.

In its quarterly Monetary Policy Report, published alongside Wednesday’s rate announcement, the bank explained why it looks at underlying measures of inflation, which show that the oil price shock driven by the closing of the Strait of Hormuz isn’t spreading beyond gas and food.

Headline inflation rose to 3.2 per cent in May, mainly because of higher gasoline prices linked to the war in the Middle East, The Globe’s Mark Rendell reports.

But the bank pointed out that inflation excluding gasoline, alongside other core measures, stayed close to 2 per cent. “This suggests that, so far, spillovers to the prices of other goods and services remain contained,” the bank said.

The disconnect

According to a recent report by the bank, Canadians share a “widespread concern” that the inflation figures the bank favours don’t align with “real-life experiences.”

“Canadians in all communities the ​Bank visited expressed concern with the cost of living,” wrote the authors of the report, which was compiled over two years of consultations with consumers, civil society groups, businesses and academics.

“Many indicated that the consumer price index (CPI) did ​not align with their experience or with what they see when they shop."

Basically, the bank is looking at a two-year forecast to decide interest rates, while Canadians are trying to figure out how to pay for groceries this afternoon.

This disconnect between the inflation the bank measures and the affordability pressures Canadians experience, Yali N’Diaye writes, can lead to diminished trust in inflation data and in the bank.

And nearing the six-month mark of the U.S.-Israeli attack on Iran, Canadians might be wondering how long oil prices need to be elevated before they’re no longer considered temporary.

Driving to work, keeping the lights on and putting food on the table account for 20 per cent of average household spending – even more for lower-income Canadians.

What Canadians are facing is an affordability squeeze, which falls in the political sphere. And most economists say it takes 18 to 24 months for rate moves to filter through the economy – far too long to effectively counteract sudden shocks like geopolitical flare-ups or sudden tariff announcements.

So, the bank is facing a bit of a paradox. Underlying data suggests reason for optimism. The country’s economic growth is expected to accelerate to 2.5 per cent in the second quarter. And despite elevated uncertainty and higher gasoline prices cutting into households’ purchasing power, consumer spending in Canada has remained resilient, RBC economist Claire Fan told me. (With a small caveat: “Households most likely have coped with rising fuel consumption by dipping into savings, without lowering purchases elsewhere,” Fan said.)

But those are forecasts based on volatile energy export revenues and temporary consumer spending boosts – and for Canadians, they risk missing deepening household debt, a slumping housing market and the long-term erosion of middle-class purchasing power.

Bridging the gap

So, what’s a central bank to do? The report highlights several ways Canadians want the institution to track affordability, including requests for specialized tracking tools like a basic-needs basket for low-income families and a seniors’ price index. But in that same report, the bank made clear those suggestions fall entirely under the jurisdiction of Statistics Canada.

Instead, the report said, the bank has to do a better job of explaining its actual role. When the bank talks about a drop in inflation, it means prices are rising more slowly. But for Canadians, the high costs are already locked in, leading to an expectation that interest rates can somehow reverse the damage and fix everyday affordability.

That is a fundamental misunderstanding that risks fuelling a deeper sense of distrust at the exact moment the central bank needs public confidence the most.