Bank of Canada Reconsiders the Way it Measures Inflation

par Andrew Rickard | October 28 2015 01:46PM

Bank of Canada governor Timothy Lane

The Bank of Canada will renew its inflation control agreement with the federal government in 2016. In preparation for this event, the Bank is considering the way it measures core inflation and whether it should continue using the CPIX benchmark.

In a speech to the CFA Society of Atlantic Canada on Oct. 27, the Bank of Canada's deputy governor Timothy Lane explained how the Bank goes about its monetary policy decision making, and specifically how it thinks about underlying trends in inflation.

Lane noted that the Bank has relied on CPIX inflation measurement since 2001, which removes volatile items such as fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest costs, intercity transportation and tobacco products, as well as the effects of changes in indirect taxes such as the GST, from the Consumer Price Index (CPI).

"As we prepare for the renewal of our inflation-control agreement with the federal government in 2016, we are examining the properties of these measures of core inflation to determine whether the Bank should continue the practice of identifying one pre-eminent measure as its operational guide and, if so, whether CPIX should continue to play that role," said Lane.

In fact, the Bank has just published a technical assessment of core inflation gauges in which authors Mikael Khan, Louis Morel, and Patrick Sabourin found that other measures, such as the trimmed mean, weighted median, and common component of CPI were better yardsticks.

"While traditional exclusion-based measures, including CPIX, are easy to explain and have played a useful role, they tend to perform relatively less well in our empirical assessment," concludes the paper. "This is in part due to the failure of such measures to effectively filter unanticipated transitory shocks."