LONDON, Ontario (Reuters) - - The divergence of the three measures of core inflation used by the Bank of Canada is not a weakness, but rather validates the central bank’s decision to use all three to measure price pressures in the economy, Deputy Governor Lawrence Schembri said on Thursday.
In a speech outlining the strengths and weaknesses of the bank’s new inflation measures, Schembri said the three new consumer price index measures were not the only thing policymakers consider when they make interest rate decisions.
“I want to emphasize that these measures are only one set of inputs into our broad and ongoing assessment of pressures on capacity and inflation,” Schembri said in prepared remarks, adding that the bank’s Business Outlook Survey and “more informal conversations” are also taken into account.
He said the bank has decided that only the projection for CPI inflation will be included in the bank’s Monetary Policy Report, to “reinforce its role as the target for monetary policy.”
In the past, the quarterly reports had included projections of CPIX inflation, also known as core inflation, and described the extent to which movements in the core inflation measure were due to sector-specific factors.
“However, we have come to realize that the attention paid to CPIX inflation may have created the misperception that it was the target for monetary policy rather than a useful operational guide,” he said in his speech to Western University’s economics department.
The Bank of Canada switched from using one measure of core inflation to three late last year: CPI-trim, CPI-median and CPI-common, which economists have said makes it difficult to know what policymakers are watching most closely.
Schembri said the three new measures have declined since mid-2016 in part because of the diminishing effects of exchange rate pass-through and persistent excess capacity.
“The wide divergence among them in recent years might reflect in some measure the prevalence of the negative price shocks that have hit the economy,” he said.
In the absence of exchange rate pass-through and other unexplained factors, all three new measures of core inflation would be below two percent, Schembri said, “broadly consistent with the Bank’s assessment of the degree of excess capacity in the Canadian economy.”
The bank has held official interest rates steady at 0.5 percent since cutting them twice in 2015, citing labor market slack and an output gap that the bank does not expect to close until mid-2018.
Reporting by Andrea Hopkins and Leah Schnurr; Editing by James Dalgleish