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Inflation may be low for now, but here’s why it would be wise to keep a closer eye on it

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The general assumption is that the economy is so weak it will be years before Macklem has to worry about inflation bursting through the upper end of the Bank of Canada’s comfort zone. Consumers will have something to say about that.

Spending patterns have shifted, so much so that the central bank and Statistics Canada felt compelled to create an adjusted measure of inflation that puts additional weight on food and shelter, while significantly discounting the effect of clothing, transportation and recreation on the overall cost of living.

For now, the Bank of Canada is only using the alternate measure as an unofficial check on the CPI. Through the spring, the re-weighted index implied inflation was somewhat hotter than the traditional measure suggested, but not so much so that policy-makers thought the CPI was sending a false signal.

Regardless, Statistics Canada has committed to update its weights more frequently, giving the central bank confidence it can keep relying on the CPI to guide its interest-rate setting.

“As the economy reopens, we expect household spending patterns to go back to something that is more normal, probably not the same as pre-COVID, but will be more normal,” Macklem said last month.

Mackem and his deputies know that some of us doubt their assessment that price pressures are muted. They’re in the middle of an extensive review of the inflation-targeting regime and public consultations have revealed doubt about the validity of the CPI. That’s because there’s nothing deflationary about our weekly visits to the grocery store. The food basket that Statistics Canada includes in the CPI was 2.2 per cent more expensive in July, and 2.7 per cent higher in June. Shelter costs were 1.5 per cent higher last month than a year earlier.

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