Bank of Canada looking at alternatives for measuring core inflation

HALIFAX – The Bank of Canada is examining alternatives to its “core inflation” method of tracking prices as it prepares to review its inflation-control agreement with the federal government next year.

In a speech to a business audience in Halifax, deputy governor Timothy Lane says an effective measure of core inflation must be less volatile than total inflation and closely track long-run movements in the total Consumer Price Index.

It should also be related to the underlying drivers of inflation and easy to understand and explain to the public, he says.

Under its current five-year agreement with Ottawa, the central bank targets two per cent inflation — the midpoint of an range of from one to three per cent.

The Bank of Canada currently excludes eight of the most volatile components to calculate core inflation to help discern genuine movements in the underlying trend in inflation.

However, there are other methods. One excludes food, energy and indirect taxes, while another excludes different components each month based on whether or not they are particularly volatile in that specific month.

The inflation-control agreement between the Bank of Canada and the federal government expires at the end of next year.

Lane said the inflation-targeting used by the central bank has been “vastly superior” to the alternatives that have been tried.

“Our periodic renewals are important opportunities to make sure it continues to serve its purpose and to suggest improvements,” Lane said.

“The critical test is the confidence you have that inflation will remain within our target range. We would like the public to take two per cent inflation for granted.”