Global Factors and Inflation in Canada

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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.