Deputy Governor Rhys Mendes discusses the importance of understanding which parts of inflation are lasting and which are temporary. He also talks about the Bank of Canada’s upcoming renewal of its monetary policy framework.
Watch Deputy Governor Mendes speak to the Ivey Business School in London, Ontario. Read the full speech.
What underlying inflation means
Canada has a 2% target for total inflation. To keep inflation close to that target, the Bank of Canada adjusts the policy interest rate.
But changes to the policy interest rate take time to filter through the economy. That’s why the Bank can’t—and shouldn’t—respond to every blip on the radar. We need to filter out the temporary part of inflation—some of the price changes that aren’t likely to last—from the lasting part. We call this lasting part underlying inflation.
Unlike other economic indicators, underlying inflation isn’t something we can specifically measure. Instead, we look at lots of inflation data to try to pinpoint where underlying inflation lies.
It can take up to two years for changes in the policy interest rate to have their full effect on inflation, so reacting to temporary movements could end up causing more volatility.”
How we assess underlying inflation
We look at many different indicators to assess underlying inflation.
One of these is core inflation, which tries to filter out short-term price changes. For example, some measures of core inflation exclude prices for food and energy, which can be quite volatile.
We also consider how widespread inflationary pressures are and how quickly some prices are rising compared with others. And we drill deeper into what’s happening with specific goods and services that make up the consumer price index (CPI) basket—a typical shopping basket of things Canadians buy that is used to calculate CPI inflation. This gives us a better idea of not only the factors behind underlying inflation but also how long they are likely to last.
Our monetary policy framework renewal
Every five years, we review and renew our monetary policy framework. We look back to assess how well the current framework has performed, and we look ahead to consider whether it remains fit for the future. This is particularly important given the changing global trade landscape and resulting risks and uncertainties the Canadian economy faces.
For the next renewal in 2026, we are considering three main questions when it comes to how we assess and talk about underlying inflation:
- Can we improve our existing measures of core inflation?
- Are there other measures of core inflation that we should be looking at?
- How should we talk about core inflation and other indicators?
When faced with more uncertainty, we need to make sure we have the right tools to understand the factors behind inflation. And we need to make sure we are being clear when we explain how we’re using those tools.”
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September 23, 2025
Research Topic(s):
Inflation and prices,
Inflation targets,
Monetary policy communications,
Monetary policy framework,
Price stability