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That sinking feeling: Canadians losing faith in price index and that has central bankers worried

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When policy-makers started thinking about the issues they should explore back in 2017, the emphasis was on whether there might be a better way to set interest rates than targeting an annual two-per-cent increase in the CPI, the Bank of Canada’s approach since the early 1990s.

It’s critical that we measure inflation as accurately as possible so Canadians have confidence in our target

Carolyn Wilkins

That work is coming along. Rhys Mendes, the central bank’s managing director of international economic analysis, presented at a virtual conference on Aug. 26 an overview of preliminary results of the “horse race” officials are conducting between a set of popular theories on how central banks should conduct monetary policy.

So far, the current regime is performing well. Adding an employment goal to the inflation target also produces positive outcomes, as does a framework that attempts to achieve an average rate of inflation over a longer period of time. Mendes had fewer positive things to say about two other approaches that are popular with academics: price-level targeting, which would require setting interest rates to achieve a specific increase in the CPI rather than a rate of change; and the idea that central banks should target a certain change in nominal gross domestic product.

To be sure, the Bank of Canada’s research so far detects only marginal differences between all the approaches. “I’m not sure the gains would justify shifting away from the current mandate,” said Mendes, who early in his presentation made clear that he was speaking for himself and not Governor Tiff Macklem, Wilkins and the other members of the Governing Council.

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