Inflation pressures can emerge from a variety of sources and evolve in different ways. Prima is a model for assessing those pressures. It builds on the economic foundations of previous models while adding a richer view of conditions in individual sectors.
The Bank of Canada began using Prima in September 2026 to build its quarterly projection and assess risks to its inflation outlook. Like the Bank’s previous models, Prima captures how demand, supply, inflation expectations and monetary policy affect consumer price index (CPI) inflation. What makes Prima different is that it builds this analysis from conditions in individual sectors and links them to the broader economy. This makes Prima better suited to assess the inflationary effects of shocks that begin in specific sectors as well as economy-wide shocks that affect sectors differently.
As the Bank’s core model for projections and policy analysis, Prima helps to:
- identify the forces driving CPI inflation in the sectors that produce the goods and services households consume
- assess how shocks in different sectors can affect costs and consumer prices
- explain how costs, demand conditions and inflation expectations shape how businesses set prices
- analyze how monetary policy affects household spending through more detailed consumption and housing channels
- compare alternative scenarios by tracing how different shocks and assumptions could affect the inflation outlook
The Bank’s previous framework
In the Bank’s previous model, inflation was assessed largely by comparing economy-wide demand for goods and services with the economy’s capacity to supply those goods and services. When demand ran ahead of supply, inflationary pressures tended to rise. When demand fell short, those pressures tended to ease. The assessment relied on estimates of potential output—a benchmark of productive capacity, based on trends in labour input and productivity. The model also incorporated inflation expectations, oil prices and import prices into its assessment.
A rich view of sectors, spending and costs
The post-pandemic surge in CPI inflation showed how challenging it can be to assess inflationary pressures using measures of economy-wide slack when supply, demand and costs evolve differently across sectors. During the pandemic, an abrupt shift and rebound in demand collided with production disruptions and bottlenecks, sharply reducing supply and raising costs in certain sectors. Those higher costs then spread through supply chains, putting upward pressure on prices across the CPI basket.
Similar challenges can arise from trade tensions, geopolitical developments, energy market disruptions, climate events and housing constraints. These forces can affect sectoral supply, demand and costs in ways that matter for overall inflation.
When assessing CPI inflation, what matters most is how supply, demand and costs are evolving in the sectors that produce what households consume. Prima brings sectoral forces, along with pricing decisions, together within one model. By drawing on current conditions in individual sectors, it can help identify how sector-specific pressures move through supply chains and contribute to overall inflation.
This contrasts with the previous model, which assessed inflationary pressure largely through the balance of economy-wide demand and supply. Because that view of supply capacity was built from economy-wide trends in labour input and productivity, it was less suited to capturing abrupt short-run supply disruptions in specific sectors.
Prima provides a clearer view of the pressures most relevant to CPI inflation. It also provides a richer view of how monetary policy affects household spending—including through consumption and housing decisions—and how those effects feed back into sectoral activity and inflation.
How shocks can affect inflation over time
Some shocks affect many parts of the economy at once. Others begin in individual sectors and spread through supply chains. Because businesses rely on inputs from other businesses, a shock that raises or lowers costs in one sector can affect costs and prices elsewhere.
Where a shock starts matters. For example, a semiconductor shortage can raise costs for producers of motor vehicles, appliances, office equipment and other products that use electronic components. In contrast, a shock concentrated in motor vehicle prices is more likely to have effects that are limited to that component of the CPI. Prima helps the Bank connect where a shock starts with its likely effects on costs and consumer prices.
The expected duration of a shock also matters. Businesses may absorb a cost increase they expect to be short-lived. But if they expect the increase to persist, they are more likely to pass it through to prices quickly and broadly.
In general, the inflationary effects of a shock depend on:
- its size and how long it is expected to last
- where it begins and how widely it spreads
- the structure of businesses’ costs
- how frequently prices are adjusted
- demand conditions and competition, which affect how businesses adjust prices when costs change
- inflation expectations, which influence wage and price setting
By bringing all these factors together, Prima helps the Bank determine whether the effects of a shock are likely to remain limited or spread through the economy and have more lasting consequences for inflation.
Evidence, judgment and risk assessment
Prima draws on a range of historical data, such as:
- sectoral prices and quantities
- wages
- commodity, import and producer prices
- industry input use
- frequency of price changes
Together, these data help Prima connect supply and demand conditions across sectors to costs, pricing decisions and consumer prices.
Even with this richer structure, Prima does not eliminate uncertainty or the need for judgment. Information from outside the model—such as near-term indicators, Bank surveys, and insights from outreach with businesses and communities—can be used to adjust the near-term inflation forecast. Prima then interprets the revised forecast through the lens of sectoral supply, demand, costs and pricing behaviour, and carries the implications forward in the projection.
Prima also helps the Bank analyze complex alternative scenarios that require fewer separate assumptions outside the model. Because more of the relevant economic relationships are built into Prima, scenarios can be generated more quickly and are more internally consistent. This makes it easier for the Bank to compare outcomes across scenarios.
Implications for monetary policy
The objective of monetary policy is to keep inflation low, stable and predictable. Many shocks that matter for inflation begin in specific sectors or affect sectors unevenly. They can alter costs along supply chains and have important consequences for inflation.
Compared with the previous model, Prima gives the Bank a more integrated way to analyze these sectoral and supply-side forces while retaining the core macroeconomic principles that guide monetary policy. By linking sectoral developments to the broader economy, Prima strengthens the analysis that supports monetary policy decisions and helps the Bank achieve its 2% inflation target.