October 24, 2016 / 1:22 PM / 9 months ago

Bank of Canada renews inflation target, adjusts how it gauges inflation

3 Min Read

A woman walks past the Bank of Canada office in Ottawa, Canada July 16, 2015.Chris Wattie

OTTAWA (Reuters) - The Bank of Canada on Monday renewed its inflation target at 2 percent and said it will change the way it measures inflation in order to better gauge long-term trends, a shift which some analysts said could make it harder to predict the central bank's policy changes.

The decision to target inflation at the midpoint of a 1-to-3 percent range for another five years was largely expected, as the central bank had repeatedly said the bar to change was high.

In announcing a change to how inflation is measures, the bank said that instead of using just one "core" inflation measure, the central bank said it will use three to measure consumer price changes. Core inflation measures exclude some volatile items to try to get a clearer picture of price changes.

The three new measures have diverged significantly in the past and will likely create a communications challenge for the central bank, Brian DePratto, an economist with TD Economics, said in a research note.

"There will be a learning curve among market participants as they try to gauge the relative importance the bank places on each measure at any given meeting," he said.

Statistics Canada, which publishes the consumer price index, will begin releasing the three new CPI measures in December with the release of the inflation report for November.

The Bank of Canada looks at inflation pressures to set official interest rates, but the inflation target policy had come under scrutiny as overall inflation remained below the 2 percent target month after month without prompting a rate cut.

Other countries have also struggled to meet their inflation targets in a slow growth environment, even with interest rates at or near zero.

Analysts said the shift from the existing core measure, called CPIX, makes official what the bank had been doing for some time - but will not be easy for ordinary investors to understand.

"For a while they have been saying CPIX was not a good indicator, so this is a move towards transparency," said Royce Mendes, senior economist at CIBC Capital Markets. "Obviously it comes at the expense of simplicity ... and it could become a communications issue for the central bank."

The three new measures to be used are CPI-common, CPI-trim, and CPI-median. CPI-common measures common price changes across categories in the CPI basket; CPI-trim excludes upside and downside outliers; and CPI-median is the median inflation rate across CPI components, the bank said.

Additional reporting by Fergal Smith in Toronto; Editing by Bernadette Baum and Leslie Adler

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