Lane Says Bank of Canada May Adjust Core CPI Measure in 2016

Canada’s central bank may adjust the way it measures “core” consumer prices when it renews an inflation-targeting agreement with the government next year.

The Bank of Canada’s current benchmark of core prices that excludes eight volatile items such as fresh fruit is underperforming relative to other indexes under consideration for next year, deputy governor Tim Lane said Tuesday in Halifax, Nova Scotia. The current index, known as CPIX, has been the central bank’s main guide since 2001 on whether the total inflation rate will stay near the bank’s 2 percent target.

While the central bank has been using the more-stable core rate as an “operational guide,” it is now reassessing its measures ahead of the 2016 mandate renewal. Policy makers including Governor Stephen Poloz have recently said the true rate of underlying inflation is actually lower than what’s suggested by core, calling into question the usefulness of CPIX.

“We are examining the properties of these measures of core inflation to determine whether the Bank should continue the practice of identifying one pre-eminent measure as its operational guide and, if so, whether CPIX should continue to play that role,” Lane said.

The bank sets its benchmark interest rate, now at 0.5 percent after reductions in January and July, to keep inflation as close to 2 percent as possible. That rate influences how much consumers pay for everything from mortgages to cars.

Poloz and Trudeau

Lane said there will probably be no major changes to the inflation-target regime, echoing comments by Poloz and incoming Liberal Prime Minister Justin Trudeau. Past agreements on how the bank sets interest rates to meet a mandate for price stability have lasted for five years.

“We would like the public to take 2 percent inflation for granted,” Lane said in his Halifax speech. “We are examining the properties of these measures of core inflation.”

Other indexes of core under consideration include so-called common component and weighted median measures. Those are better able to detect longer-lasting inflation, Lane’s presentation showed, because they are less volatile and their movements are more tied to the amount of slack in the economy.

Policy makers have also said in past speeches their research is focused on whether more attention should be paid to possible financial-market bubbles, and whether today’s era of slower growth means a higher inflation target is needed to give the policy interest rate more room to fall before hitting zero in a downturn.

Neutral Rate

Future interest rates and economic growth may be lower because of smaller gains in the size of the labor force, Lane said, something policy makers have linked in the past to an aging population.

“The slowing of the Canadian labor force has resulted in a lower rate of potential growth in Canada but it’s also resulted in a lower neutral rate of interest,” he said. “We’d expect that in general the level of interest rates would be lower than it had been in the past.”

In the shorter term, Canada’s job market hasn’t returned to normal after the unemployment rate surged in the last recession in 2009, Lane said.

“We have had a lot more long-term unemployment than is typical, we’ve had more involuntary part time work, we’ve had depressed labor force participation,” Lane said.

The central bank’s current policy rate “is appropriate and we don’t see a need to provide further monetary policy support at this time,” Lane said.

A weaker Canadian dollar is boosting the competitiveness of the country’s producers, and exchange-rate sensitive exports are strengthening, Lane said.

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