How the Bank of Canada Measures Inflation| Insightful Guide

The Bank of Canada sets monetary policy by targeting inflation. First introduced in 1991, the inflation-control target is set jointly by the Bank of Canada and the Federal Government and reviewed every five years. In 2016, they agreed that the inflation target would continue to be the 2 percent mid-point of the 1 to 3 percent inflation-control range until 2021. At present, inflation is at the lower end of the operating band.

Not every country’s Central Bank sets monetary policy by targeting inflation. Some look to influence other factors like the employment rate, or the value of their currency.

For the past 5 years, the “Core” Consumer Price Index (CPIX) was the Bank’s preferred measure of inflation. This calculation strips out eight of the most volatile CPI components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products). Since January 2017, the Bank has stopped using CPIX as its preferred measure and has instead focused on three measures: CPI-common, CPI-trim, and CPI-median.

CPI-common measures common price changes in a given month, CPI-trim excludes extreme monthly price changes, and CPI-median looks at the median of price changes in terms of Consumer Price Index sub-component weights during the month.

These economic risk-management techniques are used to smooth out “bumps” in order to predict what the “sustained” trend really is.