Core CPI? Don't Bank On It to Predict Inflation: C.D. Howe Institute

TORONTO, Sept. 29, 2011 /CNW/ - The Bank of Canada should place less emphasis on the "core" Consumer Price Index (CPI) in explaining its policy choices, according to a report released today by the C.D. Howe Institute. In, "Core, What is it Good For? Why the Bank of Canada Should Focus on Headline Inflation," authors Philippe Bergevin and Colin Busby say that core CPI, an inflation measure which strips out from the consumer price basket some of the most volatile items and which the Bank uses as an operational guide, has diverged from total CPI and may give misleading signals about future inflation.

"The Bank should consider relying less on core CPI as a guide to future inflation," stated Philippe Bergevin. "Our analysis shows it is only one of many imperfect measures of underlying inflation."

With inflation, as measured by the total CPI, growing faster than the Bank of Canada's 2 percent target, the Bank has pointed out that core - which excludes items whose prices are especially volatile, such as fruits, gasoline and mortgage interest costs - is at or below target and, further, that the Bank anticipates total CPI eventually will converge with the core measure. The Bank occasionally uses such reasoning in explaining why, despite inflation's running above its target, monetary policy action is unnecessary, note the authors.

While the Bank is justified in using core CPI as one of many imperfect measures of underlying inflation, say the authors, their analysis suggests that the Bank should, at a minimum, revisit the role of core within its inflation-targeting framework and consider de-emphasizing core CPI in its communications or as an operational guide.

For the report go to: http://cdhowe.org/pdf/ebrief_124.pdf

SOURCE C.D. Howe Institute

For further information:

Philippe Bergevin, Policy Analysts, or Colin Busby, Senior Policy Analyst, C.D. Howe Institute,

416-865-1904;

Email: cdhowe@cdhowe.org.

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