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A New Measure of Core Inflation

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    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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    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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