As we pointed out a few months ago, the confusing part about inflation is that it often means something different depending on one’s perspective. For example, while the Bank of Canada uses core inflation to set its monetary policy, that figure does not include the cost of fuel and food, which nonetheless represent a significant chunk of many household budgets.
The extent to which inflation is a matter of perspective was made plain in a July 8 Scotiabank report, in which economists Karen Cordes Woods and Derek Holt assert that core inflation “is tamer than than the hawks are arguing.” As they assert, the May Canadian inflation report released by Statistics Canada, which put the month-over-month headline and core increases at 0.7% and 0.5% respectively, “was interpreted through a hawkish lens by inappropriately referencing seasonally UNadjusted data.” But when adjusted for seasonality, “headline and core inflation were up only 0.2% [month-over-month] in each case.” The same is true, the authors maintain, for quarter-over-quarter inflation, where adjusting for seasonality drops the rate from 5.6% to 3.8%.
Not surprisingly, the point these authors are driving at is that the Bank of Canada is quite right to take month-over-month changes in the inflation rate with a grain of salt. “The BoC has stated rather clearly to look through near-term inflation, partly because there isn’t anything it can do about it anyway but also because (and we agree) it believes many of the pressures will abate into next year,” they write. Needless to say, with no clear indication that interest rates will change any time soon, everyday Canadians are banking on the fact that they’re right.