By Promit Mukherjee and David Ljunggren
OTTAWA, Oct 2 (Reuters) – The Bank of Canada is considering changes to how it measures preferred inflation metrics to give it a better idea of how external shocks are affecting the economy, a senior official said on Thursday.
Deputy governor Rhys Mendes said inflation was becoming more volatile given swings in U.S. trade policy, structural changes and rising geopolitical conflict.
“So we need to think about how we assess — and talk about — underlying inflation as we confront this new reality,” he said.
The study into whether officials can do a better job of measuring underlying inflation will be part of a scheduled five-year view of the central bank’s mandate with the government.
The framework is up for renewal next year and the BoC has already confirmed that its mandate of keeping overall inflation at 2% will not be touched.
The bank has two preferred measures of core inflation which strip out the prices of more volatile items and are designed to give a more accurate idea of underlying pressures.
CPI-median takes into account the central components of the consumer price index basket while CPI-trim excludes the most extreme price changes.
“We’re asking ourselves if there are ways we could improve our existing measures of core inflation,” Mendes said, noting that every measure – no matter how well-designed – would at times send misleading signals.
One option under review is the so-called multivariate core trend inflation, a method that isolates the persistent part of inflation and then splits it into two categories.
The bank’s existing measures, he said, made it hard to judge how movements in mortgage interest costs affected inflation.
“One question we are asking … is whether we should revise our preferred measures and our alternative measures of core inflation so they all pre-exclude mortgage interest costs. It’s something we’re considering carefully” he said.
The bank is also mulling the use of artificial intelligence tools to measure core inflation, Mendes said, questioning whether it should continue to use the word “preferred” when talking about core measures as it could give misleading signals.
Mendes reiterated that most measures of inflation show that underlying inflation is around 2.5%.
This was one of the factors that helped persuade the bank to cut rates last month to 2.5%, its first reduction in six months.
“When we looked ahead, we saw reasons to believe that underlying inflation would ease,” Mendes said.
((Reuters Ottawa bureau))
Keywords: CANADA CENBANK/
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