Despite the larger-than-expected rise in inflation in August, the Bank of Canada says that such “ups and downs” are not unexpected.
Sharon Kozicki, Deputy Governor of the Bank of Canada, made the comment during a speech Tuesday in which she addressed recent movement in inflation and the mechanics of how it is measured.
While Kozicki says CPI inflation in Canada has fallen “significantly” from its peak of 8.1% in June 2022 to a low of 2.8% this June, she addressed the recent upsurge, the latest being August’s reading of 4%.
“Ups and downs of the size we’ve seen in the past couple of months are not that unusual and are one reason why we look at measures of core inflation—which exclude components with more volatile price movements—to get a sense of what underlying inflation is,” she said.
Measuring underlying inflation
However, despite slower inflation growth, Koznicki said measures of core inflation, which strip out more volatile items like food and energy, still remain broad-based and have shown “little recent downward momentum.”
She addressed criticism the Bank has received from those who suggest mortgage interest costs—which are among the top drivers of headline inflation and are directly a result of the Bank’s rate hikes—are upwardly distorting overall inflation readings.
In response, she provided the following scenario: “Consider a CPI basket that has all the same goods and services, other than mortgage interest costs, and apply the methodologies to calculate core inflation to this slightly smaller basket,” she said. “When we do this, we find that the new measures of core inflation are lower, but only by about one-quarter of a percentage point.”
Even by removing the mortgage interest cost component, Koznicki said, “Underlying inflation is still well above the level that would be consistent with achieving our target of 2% CPI inflation.”
Signs that rate hikes are working
Commenting on the Bank of Canada’s latest rate hold in September, Koznicki said the Bank is encouraged by recent data pointing to a slowdown in demand.
She pointed to a “sharp slowdown” in economic growth as the result of a slowdown in consumer spending, household credit growth and a decline in housing activity.
“And we are mindful that past increases in interest rates will continue to weigh on activity,” she added.
While Koznicki acknowledged that the Bank’s rate hikes have been “very painful for some,” she repeated a line from the Bank’s last rate decision announcement by saying “we are prepared to raise the policy interest rate further if needed.”
“We don’t make these decisions lightly,” she added. “But we also know that the burden of persistently high inflation weighs on households of all income levels and in every part of the country.”
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