The Bank of Canada doesn’t go into detail about what “high underlying inflation” is. Are you able to detail precisely what the Bank of Canada considers underlying inflation? THANKS.
— Michel Couture
The definition of inflation is simple, measuring it is another kettle of fish. There is not just one measure, but several. To see things more clearly, we asked for help from professor in the UQAM economics department Alain Guay and economist Benoit Durocher from Desjardins.
The best known and most used of these measures is the Consumer Price Index. The CPI is an overall measure that tracks the evolution of the prices of a basket of goods and services among the most used by Canadian households.
It’s also an imperfect measure, says the professor, because the prices of many products and services within the eight main components of the CPI change often and quickly. They are said to be very volatile. “We think of gasoline, for example, whose prices fluctuate a lot from one month to the next, and of food. »
This is why the Bank of Canada is interested in measures of inflation that exclude the largest month-to-month fluctuations. The CPI-tronq and the CPI-med are two indices that exclude the components that have the highest upward and downward variations for a given month.
This gives an idea of core inflation, which the Bank of Canada follows more closely than overall inflation measured by the CPI.
The overall CPI fell to 2.9% in January, but the CPI-truq and the CPI-med remain around 3.3% and 3.4%, which the Bank of Canada still considers too high because these numbers are above its target range of 1% to 3%.
Core inflation derives from core inflation measures because it represents longer-term price trends, explains Alain Guay.
“The Bank of Canada uses economic models in which it puts all the inflation measures and the result of which indicates a longer-term trend than the CPI for inflation,” he summarizes.
When the Bank of Canada talks about underlying inflation or core inflation, it’s the same thing, summarizes economist Benoit Durocher. There are many ways to break down the overall CPI to get a more precise measure of inflation and its causes.
Thus, Statistics Canada provides the Bank of Canada with an inflation index that excludes housing. In January, this index was only 1.5%, indicating that house prices and the cost of mortgage interest are currently the main causes of overall inflation as measured by the CPI.
The Bank of Canada recognizes that interest rate increases contribute to inflation, but believes that the problem is mainly that the supply of housing is largely insufficient to meet demand while Canada welcomes a record number of immigrants.
Check out our Demystifying the Economy section