MNI: Rent, Ex-Energy Goods Give BOC Confidence Core CPI Fading

Slowdowns in property rents and the cost of materials to produce goods have given Bank of Canada officials confidence that trend inflation is slowing, Deputy Governor Rhys Mendes said Thursday, as they cut interest rates even while core indexes remain elevated.

Those two categories have been responsible for a good part of elevated inflation this year so signs of moderation are significant and were a focus of Governing Council deliberations when the policy rate was held in July and lowered in September, he said in a speech at Western University in London, Ontario. 

"When we looked ahead, we saw reasons to believe that underlying inflation would ease," he said. "For example, rental markets are softening, which should help keep inflation in prices for shelter services on a downward trend. And growth in inputs costs has largely normalized, which should help cool inflation in non-energy goods prices." The speech gave no assessment on the outlook for the policy interest rate of 2.5% or for near-term inflation.

Investors appear to have placed too much emphasis on the Bank's three preferred core inflation indexes and officials may abandon that designation after next year's framework review, Mendes said. The Bank has always looked at a broader range of measures to generate a view of "underlying inflation" and he stressed no single index is robust to all the shocks faced by Canada's economy. 

The Bank is also considering whether to exclude mortgage interest costs from its core inflation measures because they are tied to the Bank's policy and can distort what's going on across the wider economy, he said. New core measures could include a "multivariate core trend inflation" index seeking to separate price gains that appear across a wide part of the economy from ones specific to a few sectors. A problem with an MCT measure comes from revisions, which became a problem with the Bank's CPI-common index, he said. 

"While all core measures sometimes give misleading signals, our preferred measures have generally proven to be helpful. And more often than not, they have provided us with a clear way to talk about underlying inflation," Mendes said. "But we also don’t want Canadians or financial markets to become overly focused on a single indicator."

The Bank may also broaden the list of preferred inflation measures, he said.

Tracking inflation is a more complicated task as the global economy faces changes, he said. "The abrupt swings in US trade policy have shocked Canada’s economy. And we’re facing structural change and rising geopolitical conflict. With these shifts come the potential for more and larger shocks. That means greater volatility in prices and the possibility of higher inflationary pressures."