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A New Measure of Core Inflation

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    Abstract

    While the Bank of Canada's inflation-control target is specified in terms of the rate of increase in the total consumer price index, the Bank uses a measure of trend or "core" inflation as a short-term guide for its monetary policy actions. When the inflation targets were renewed in May 2001, the Bank announced that it was adopting a new measure of core inflation. This measure excludes the eight most volatile components of the CPI and adjusts the remaining components for the effect of changes in indirect taxes. In this article, the author discusses the definition of the new measure of core inflation and describes some of its advantages relative to the previous measure. He notes that the new measure has a firmer statistical basis, has a better correspondence with economic theory, and does a better job of predicting future changes in overall inflation. While the new measure has these advantages, the Bank will continue to monitor a broad range of indicators when assessing the likely future path for inflation.

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    Bibliographic Info

    Article provided by Bank of Canada in its journal Bank of Canada Review.

    Volume (Year): 2001 (2001)
    Issue (Month): Autumn ()
    Pages: 3-12

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    Handle: RePEc:bca:bcarev:v:2001:y:2001:i:autumn01:p:3-12

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    Cited by:
    1. Jorge Canales-Kriljenko & Turgut Kisinbay & Rodolfo Maino & Eric Parrado, 2006. "Setting the Operational Framework for Producing Inflation Forecasts," Working Papers Central Bank of Chile 362, Central Bank of Chile.
    2. Dodge, David, 2002. "Inflation targeting in Canada: Experience and lessons," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 113-124, August.
    3. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among them," IMF Working Papers 06/97, International Monetary Fund.
    4. David Longworth, 2003. "Implications of a changing economic structure for the strategy of monetary policy : commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 349-360.
    5. Gregor W. Smith, 2009. "The Missing Links: Better Measures of Inflation and Inflation Expectations in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 287, April.
    6. Kevin Clinton, 2006. "Wicksell at the Bank of Canada," Working Papers 1087, Queen's University, Department of Economics.
    7. William B.P. Robson, 2009. "To the Next Level: From Gold Standard to Inflation Targets - to Price Stability?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 285, March.
    8. Philippe Bergevin & Colin Busby, 2011. "Core, What is it Good For? Why the Bank of Canada Should Focus on Headline Inflation," e-briefs 124, C.D. Howe Institute.
    9. Kevin Clinton, 2006. "Core inflation at the Bank of Canada: A critique," Working Papers 1077, Queen's University, Department of Economics.
    10. Souvik Gupta & Magnus Saxegaard, 2009. "Measures of Underlying Inflation in Sri Lanka," IMF Working Papers 09/167, International Monetary Fund.

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