Bank of Canada Needs a Better Way to Track Inflation - C.D. Howe Institute

TORONTO, Aug. 12, 2015 /CNW/ - The Bank of Canada should track inflation using a measure that better accounts for changes in resale housing prices, according to a new C.D. Howe Institute report. In "Improving on the CPI: A Proposal for a Better Inflation Indicator," authors Finn Poschmann and Aaron Jacobs urge the Bank to shift its focus to a more appropriate measure of the cost of inflationary trends when conducting monetary policy.

"The Bank currently targets headline inflation, as measured by the Consumer Price Index, but the CPI as currently constructed was not designed with monetary policy in mind," remarked Poschmann. "The Bank of Canada's inflation targeting system is due for review in 2016—this is the perfect opportunity for the Bank to reconsider how it measures inflation in setting monetary policy, including its setting of the overnight interest rate."

The Bank currently aims to keep annual increases in the CPI, as calculated by Statistics Canada, at the 2 percent mid-point of a 1 to 3 percent target range. It uses a measure stripping the CPI of its most volatile components, known as core CPI or CPIX, as an operational guide on its way to achieving its CPI targets. Both measures leave out important components of household spending. The CPI does not directly measure the price of resale homes, and the CPIX excludes the eight most volatile components, such as fruit and gasoline prices, and mortgage interest costs.

The authors recommend that Statistics Canada publish a CPI that takes resale housing prices into account. The Bank should then take advantage of this index to produce a measure of core inflation—the "common component price index" or CCPI—that better reflects underlying inflation trends, including housing prices. "The CCPI is in our view a more reliable measure of inflationary pressures than CPIX, and should therefore displace the CPIX as the main operational guide as to whether the Bank is on track to meet its inflation target," said Jacobs.

Poschmann concludes: "While no inflation measure is perfect, the CCPI would provide the Bank a better indicator of prices when conducting monetary policy."  

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada's trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada's most influential think tank.

For the report go to: https://www.cdhowe.org/improving-cpi-proposal-better-inflation-indicator

SOURCE C.D. Howe Institute

Finn Poschmann, former Vice President, Policy Analysis; Aaron Jacobs, Researcher, C.D. Howe Institute; 416-865-1904, or email: [email protected].