Definitions

Inflation:

A persistent rise over time in the average price of goods and services - in the "cost of living."

Consumer price index (total CPI):

A measure that tracks movements over time in the level of consumer prices. The CPI compares the retail prices of a representative "shopping basket" of goods and services at two different points in time.

“Core” consumer price index (CPIX):

This measure strips out eight of the most volatile CPI components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products), as well as the effect of changes in indirect taxes on the remaining components. The Bank also monitors other measures of underlying (“core”) inflation.

“Core” inflation - an operational guide

In the short run, the prices of certain CPI components that are particularly volatile, as well as changes in indirect taxes, cause a good deal of fluctuation in the total CPI. In setting monetary policy, the Bank seeks to “look through” such transitory movements in total CPI inflation, by focusing on “core” inflation measures, such as the CPIX, that are considered to reflect better the underlying trend of inflation. In this sense, “core” inflation is monitored as an operational guide to help the Bank achieve the total CPI inflation target, not as a replacement for it.

Inflation-control target:

The inflation-control target was adopted by the Bank and the Government of Canada in 1991 and has been renewed five times since then, most recently in November 2011 for the five years to the end of 2016. The target aims to keep total CPI inflation at the 2 per cent midpoint of a target range of 1 to 3 per cent over the medium term. The Bank raises or lowers its policy interest rate, as appropriate, in order to achieve the target typically within a horizon of six to eight quarters—the time that it usually takes for policy actions to work their way through the economy and have their full effect on inflation.

Notes

Core inflation as an indicator of the underlying trend of inflation

The inflation-control target is set in terms of the year-over-year rate of increase in the total CPI. The CPI is the most relevant estimate of the cost of living for most Canadians.

Although the target is specified in terms of the total CPI, for policy purposes, the Bank also monitors the “core” CPI (CPIX and other “core” inflation measures).

The prices of some of the goods and services included in the total CPI basket, such as those influenced by world commodity prices, are particularly volatile. Temporary movements in these prices cannot be offset by monetary policy, since the latter works with long lags. Therefore, it would not be advisable for the Bank to rely solely on the current rate of total CPI inflation as a guide in setting policy that is appropriate to achieve the inflation target in the future. The Bank seeks to “look through” transitory changes in total CPI inflation by focusing on “core” inflation measures that are considered to reflect better the underlying trend of inflation. These measures are used as operational guides for monetary policy in pursuit of the target for total CPI inflation, providing an indication of where total CPI inflation is headed in the absence of corrective policy action. Core inflation is thus monitored to help achieve the total CPI inflation target, not as a replacement for it.

Related Pages

Consumer Price Index data, 2000 to present
Monthly CPI data, including total (seasonally adjusted/unadjusted), core, CPI-XFET (CPI excluding food, energy, and the effects of changes in indirect taxes), CPIW.

Inflation Calculator
The Inflation Calculator uses monthly consumer price index (CPI) data from 1914 to the present to show changes in the cost of a fixed "basket" of consumer purchases.

Backgrounders:

On target: why the Bank of Canada targets low and stable inflation

An animated presentation on the benefits of low and stable inflation (requires Adobe Flash.)

Agreement on the Inflation-Control Target

The inflation-control target has been extended five times since 1991 - in 1993 (for the period 1995-98), 1998, 2001, 2006, and 2011 to the end of 2016.