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Is Bank of Canada Concerned About Inconsistent Inflation?

Key Highlights

  • Recent fluctuations in headline inflation have raised concerns, with August’s figures surging to 4.0% from July’s 3.3%, exceeding analyst expectations.
  • The Bank of Canada is closely monitoring core inflation measures, such as CPI-trim, to understand underlying inflation trends.
  • Despite headline fluctuations, core measures have consistently ranged between 3.5% and 4%.

On September 19, the Bank of Canada addressed the recent fluctuations in headline inflation, deeming them as normal. However, they expressed concerns that the core measures, which reveal the underlying trend, do not align with the goal of reducing inflation to the 2% target.

Headline Inflation Surge: Recent Spikes Raise Questions

Earlier in the day, August’s headline inflation data indicated a spike in the headline figure, rising to 4.0% from July’s 3.3%, surpassing the expectations of many analysts.

Focus on Core Measures

Deputy Governor Sharon Kozicki, during her speech at the University of Regina in Saskatchewan, remarked that the recent fluctuations, similar to the ones observed in the past few months, are relatively common.

  • These variations are among the factors motivating the Bank of Canada to focus on core inflation metrics, which exclude components with erratic price swings, to gauge the true underlying inflation trends.
  • One of these core measures, known as CPI-trim and excluding the surges in mortgage interest costs, has consistently hovered between 3.5% and 4% in recent months.

Expectations of Rate Hike

Kozicki emphasized that the underlying inflation rate remains significantly above the level necessary to achieve the Bank’s 2% CPI inflation target.

  • Following the release of the August inflation data, there has been an increased expectation in the money markets for a rate hike at the upcoming policy meeting on October 25, with the likelihood of an increase rising from 23% to 42%.
  • Headline Inflation has surpassed the Central Bank’s 2% target for over two years.
  • Bank of Canada Governor Tiff Macklem noted on September 7 that even after ten rate hikes totaling 475 basis points since March of last year, interest rates may not be sufficiently high to bring inflation back in line with the target.

On September 6, the Bank of Canada opted to maintain its key interest rate at 5%. They acknowledged a phase of reduced economic growth but emphasized the potential for further rate hikes if inflationary pressures persist.

Kozicki also highlighted that although previous rate increases have been effective in moderating demand, inflation remains elevated, necessitating the maintenance of relatively high real interest rates.


1. What is core inflation?

Core inflation measures exclude components with erratic price swings, providing insights into underlying inflation trends.

2. How long has inflation exceeded the Bank of Canada’s target?

Inflation has remained above the 2% target for over two years.

3. What are the expectations regarding interest rates?

There is an increased expectation of a rate hike at the upcoming policy meeting, with a likelihood of 42%.

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