FOR THE PAST 24 YEARS, THE BOC HAS ADOPTED A TARGET INFLATION RATE OF ABOUT TWO PERCENT AND IT SHIFTS INTEREST RATES HIGHER OR LOWER TO KEEP INFLATION NEAR THAT LEVEL.
THERE ARE VARIOUS METHODS THE BOC USES TO MEASURE INFLATION, INCLUDING:
Consumer Price Index (CPI)
Statistics Canada tracks more than 600 different goods and services used by Canadians. Price movement for each item is tracked and weighted to reflect its position in a typical household budget. The statistic is simple but does not take into account consumer decision making. For example, if the price of beef rises, some consumers may choose chicken.
The Bank of Canada’s “Core” Inflation Rate
This is similar to the CPI, but the BoC filters out items such as oil and gas, fruit and vegetables, and tobacco that are susceptible to short-term fluctuation leading to a distorted view of Canadian inflation.
Consumer Price Index Weighted (CPIW)
In this model, the individual components are weighted to reflect their influence on a household budget. No items are moved from the “shopping basket”, however, the bigger the swings in prices, the less influence it has in the index.
The Inflation-Control Target aims to keep inflation between 1 and 3%. And the Bank raises or lowers its policy interest rate in order to increase or decrease inflation. But the effect typically takes a year or two, to fully work its way through the economy.
At present, the Target shows 1.3%. If you notice it edging close to 3%, you can almost bet that the BoC will be raising their Key Interest Rate. At present, that doesn’t seem to be a concern.