Bank of Canada

Regular page >>
      

Rates and Statistics

Indicators

Summary of Key Monetary Policy Variables

Inflation-Control Target


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 of price movements, produced by Statistics Canada and obtained by comparing the retail prices of a representative "shopping basket" of goods and services at two different points in time.

core consumer price index (core CPI):
A variant of the CPI that excludes eight of the most volatile components prices—which account for 16 per cent of the CPI basket—(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. (Prior to May 2001, the Bank of Canada used the CPI excluding food, energy, and the effect of changes in indirect taxes as its measure of core CPI.)

core CPI inflation:
Inflation measured by the core CPI, thus excluding transitory fluctuations in the prices of the most volatile components as well as the effect of changes in indirect taxes on the remaining components.

Since in the short run, the prices of the more volatile components of the CPI, as well as the effect of changes in indirect taxes, cause a good deal of temporary movement in the total CPI, the Bank of Canada finds it very helpful to use the core measure of inflation as an operational guide to policy.

SEE ALSO: Core Inflation (Technical Report No. 89, January 2001)

inflation-control target:
The target range established by the Bank of Canada and the federal government within which the Bank aims to contain annual inflation as measured by the rate of change in the total CPI. The target range currently extends from 1 to 3 per cent. To keep inflation within this range, monetary policy needs to aim at the 2 per cent target midpoint over the six to eight quarters that are required for monetary policy to have most of its effect. By consistently aiming at 2 per cent for the 12-month rate of inflation, monetary policy can enhance the predictability of average inflation over longer time horizons.

Notes

CPI: Why core and total?
Excerpt (revised) from the Annual Report 2000

The inflation-control target is expressed in terms of the year-over-year rate of increase in the total CPI. This is the best available measure of the changes in the cost of living for most Canadian households. Although the target is specified in terms of the total CPI, the Bank uses the core CPI (the CPI excluding eight of the most volatile components as well as the effect of changes in indirect taxes on the remaining components) as the basis for its policy actions. Core CPI inflation is, therefore, the operational target for monetary policy.

Many of the short-run movements in the total CPI are caused by fluctuations in the prices of eight of the most volatile components that cannot be offset by monetary policy, since the effects of policy are spread over longer periods. By removing these transitory influences, core CPI inflation provides a better measure of the underlying trend of inflation and is, therefore, a more appropriate guide for policy.

Provided fluctuations in the prices of eight of the most volatile components have only temporary effects on inflation, the total and core measures of the CPI would move in a similar fashion over the medium term.

Related pages

Backgrounders:

Inflation-Control Target

The Consumer Price Index

Consumer Price Index data, 1995 to present
Monthly CPI data. Includes core, total (seasonally adjusted/unadjusted), CPI-XFET (CPI excluding food, energy, and the effects of changes in indirect taxes), CPIW.

Canada's Inflation-Control Strategy
Excerpt from the November 2000 Monetary Policy Report.

How Monetary Policy Works
A graphical explanation of the monetary policy transmission process.

Inflation Calculator
Shows the effects of inflation from 1914 to the present.

Renewal of the Inflation-Control Target: Background Information

Joint Statement of the Government of Canada and the Bank of Canada on the Renewal of the Inflation-Control Target