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,