This text is taken from the Courrier de l’économie of December 5, 2022. To subscribe, click here.
According to Statistics Canada, the consumer price index for all of Canada rose from 144 to 152.9 from December 2021 to June 2202 (an increase of 6.2% in 6 months). On the other hand, in the last months, from June to September 2022, the index went from 152.9 to 152.7, so it has decreased: prices in September were slightly lower than in June 2022.
So why raise the Bank of Canada’s base rate any further, since there has been no inflation between June and September 2022, since the effect of previous rate increases kicked in? This is the question posed by André Bastien, a reader.
In fact, data from Statistics Canada indicate that inflation measured by the Consumer Price Index (CPI) fell in September for the third month in a row. It went from 8.1% (on an annual basis) in June to 7.6% in July, 7% in August and 6.9% in September, to remain there in October. But you can see that we are still far from the Bank of Canada’s 2% target, hence the continued pressure on interest rates.
An illustration comes from the very volatile price of gasoline at the pump, which in September continued to decelerate (month-on-month) also for a third month in a row, and then recovered by 9.2% in October. But from one year to another, motorists still had to deal in October with gasoline prices showing an increase of 17.8% compared to the same month in 2021. Hence this famous base effect or year-over-year long mentioned by the Bank of Canada.
The month-to-month variations can give an indication of the short-term trend. When there seems to be an inflection point, we will even wait at least three months before identifying or confirming the start of a trend. Perhaps more if the price of the component fluctuates greatly from month to month.
The Bank of Canada does explain that the variations that occur over a twelve-month period do not provide as current an assessment of inflationary pressures as those based on the most recent data. Three-month inflation measures are therefore more timely, but they are also more volatile. Inflation will therefore generally be calculated over one year to smooth out some of the fluctuations in high frequency measurements or the most volatile components.
That said, for the impact on households, analysts will prefer to look at the evolution of the price of the basket of goods and services compared to the corresponding period of the previous year.
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