Evaluating Measures of Core Inflation

The Bank of Canada's inflation-control target is expressed in terms of total consumer price index (CPI) inflation, but because movements in the CPI are frequently caused by transitory fluctuations in prices, the Bank uses a measure of core inflation as an operational guide to the underlying trend of inflation. When the inflation targets were renewed in 2001, the Bank adopted a new measure of core inflation, CPIX, to replace CPI excluding food and energy. This measure excludes eight of the most volatile components of the CPI and adjusts the remaining components for the effect of changes in indirect taxes. Recent research conducted at the Bank shows that CPIX still has advantages over the alternatives. However, it remains an imperfect measure of underlying inflation. Other measures of core inflation, in particular CPIW, which down-weights volatile components, provide valuable additional information about trend inflation. The Bank will therefore retain CPIX as its official measure of core inflation, but will continue to closely monitor the other measures.