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Global Factors and Inflation in Canada

Author

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  • Dany Brouillette
  • Laurence Savoie-Chabot

Abstract

This note investigates whether the recent weakness in inflation in Canada can be related to global factors not included in the current staff analytical framework (domestic slack, movements in commodity prices and in the exchange rate). A global common factor for inflation among selected advanced economies appears to contain marginal information for Canadian inflation beyond what is found in movements in commodity prices and the exchange rate. However, our analysis of potential channels (import prices, global slack and the integration in global value chains) does not help to improve our understanding of the recent weakness in inflation. The analysis reinforces our current assessment that the weakness in inflation over recent quarters is mostly due to Canada-specific temporary factors (food and electricity prices). Still, there is a risk that part of the recent unexplained weakness in CPI inflation may not be due exclusively to Canada-specific factors, although the channels through which that global common factor operates remain undetermined. Further work is therefore needed to explore other channels (e.g., digitalization) through which the effect of this common factor might operate.

Suggested Citation

  • Dany Brouillette & Laurence Savoie-Chabot, 2017. "Global Factors and Inflation in Canada," Staff Analytical Notes 17-17, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-17
    DOI: 10.34989/san-2017-17
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    References listed on IDEAS

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    1. Louis Morel, 2007. "The Direct Effect of China on Canadian Consumer Prices: An Empirical Assessment," Discussion Papers 07-10, Bank of Canada.
    2. Mr. Yasser Abdih & Mr. Ravi Balakrishnan & Baoping Shang, 2016. "What is Keeping U.S. Core Inflation Low: Insights from a Bottom-Up Approach," IMF Working Papers 2016/124, International Monetary Fund.
    3. Raphael Auer & Claudio Borio & Andrew J. Filardo, 2017. "The Globalisation of Inflation: the Growing Importance of Global Value Chains," Globalization Institute Working Papers 300, Federal Reserve Bank of Dallas.
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    Cited by:

    1. Madigan Dockrill & Laurence Savoie-Chabot, 2018. "Introducing a Systematic Measure of Idiosyncratic Prices," Staff Analytical Notes 2018-33, Bank of Canada.
    2. Karyne B. Charbonneau & Alexa Evans & Subrata Sarker & Lena Suchanek, 2017. "Digitalization and Inflation: A Review of the Literature," Staff Analytical Notes 17-20, Bank of Canada.

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    Keywords

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    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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