Reliable investors face uncertainty due to inaccurate readings in a vital Bank of Canada inflation indicator.
Loosin' Cred Over Inflation, Eh?
Ah Canada, where economists are currently sweating like a moose in a sauna, all 'cause of a shaky inflation measure from the Bank of Canada that's causing a ruckus.
The Bank of Canada uses three favorite measures of core inflation - CPI-common, CPI-median, and CPI-trim - to track inflation trends in the Canadian economy. But CPI-common, the shiny new kid on the block, has been acting more like a hot potato lately, with frequent revisions throwing a wrench into its credibility.
These revisions expose the measure's limitations when the economy's heating up and prices start skyrocketing. Price movements once thought to be transitory turn out to be persistent, leaving analysts scratching their heads and questioning its usefulness.
According to economist Doug Porter from BMO Capital Markets, "the steep upward revisions to common have rendered it useless as a policy guide… It missed the inflation boat at the start of the year and sent an entirely misleading signal to policymakers."
So, how does CPI-common measure core inflation? It digs deep into the consumer price index, pulling out components that move together and separating those that seem to dance to their own beat, thanks to sector-specific events. By contrast, CPI-trim and CPI-median bring order to the chaos by filtering out extreme price fluctuations.
CPI-common never needed a revison when inflation huddled close to the Bank of Canada's 2% target. But with inflation blowing past 3% for the past 17 months and hitting a whopping 7% in August, it's getting a workout every month.
Statistics Canada explains this is because the model is picking up more price co-movement, requiring a monthly recalculation. But as the price moves become more synchronous, many worry that the wiggle room for temporary factors gets smaller, potentially overstating persistent inflation.
Despite these concerns, the Bank of Canada remains adamant about sticking with its core measures. Spokesman Alex Paterson stated, "We'll keep looking at all of our core inflation measures" as they aim to wrangle inflation back to the target.
But some analysts question whether this is enough, as the odds of a recession are rising. Stephen Brown, senior Canada economist at Capital Economics, urges the bank to take a hard look at its tracking methods.
Some analysts argue the Bank of Canada should return to using CPIX, a simplicity measure that excludes eight volatile components, while others advocate tracking only the components that are rising too quickly for the 2% target. Some even favor a measure similar to the one the United States uses for underlying price pressures, excluding food and energy.
In light of these disputes, it's time for the Bank of Canada to clean up its measure act to avoid overcomplicating things and make accurate calls for policy actions to keep Canada's economy on track.
- Given the rising odds of a recession, some analysts are urging the Bank of Canada to reconsider its measures, such as excluding food and energy, as in the United States' underlying price pressures measure, to ensure accurate policy actions and maintain the economy on track.
- The steep upward revisions to CPI-common have caused concerns among analysts, with Doug Porter from BMO Capital Markets stating that it is now useless as a policy guide due to its inconsistencies during high inflation periods, making it difficult to accurately track core inflation.
