Better Inflation Measures Proposed for Bank of Canada: C.D. Howe Institute Study

    TORONTO, April 23 /CNW/ - The Bank of Canada's inflation-targeting regime
currently relies on imperfect measures of inflation and inflation
expectations, according to a study released today by the C.D. Howe Institute.
In The Missing Links: Better Measures of Inflation and Inflation Expectations
in Canada, author Gregor Smith says the overall performance of monetary policy
would be improved if new measures of inflation and inflation expectations were
incorporated into the Bank of Canada's inflation-targeting regime, when it
comes up for review in 2011.
    Professor Smith identifies two gaps in current measurements. The first
relates to problems with the Consumer Price Index (CPI) - the weights assigned
to the basket's contents are infrequently revised and soon become outdated, so
the index does not capture the effects of shifts in consumer spending away
from items with rising prices to cheaper substitutes. As a result, the CPI
overstates inflation by up to 1 percentage point annually, relative to the
Bank's 2 percent inflation target. Smith proposes a new, chained price index.
    Smith also identifies a gap in the lack of a robust measure of expected
inflation, and recommends a new survey of private sector forecasters.
    For the study click here.

For further information:

For further information: Gregor W. Smith, Professor of Economics,
Queen's University, (613) 533-6659

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