In a speech to the Canadian Association for Business Economics, Vice-Governor Lawrence Schembri said the price perception gap had important implications for the central bank, which for three decades had targeted a annual inflation rate of 2%.
The comfort zone that the bank sets for its inflation target is a key factor in determining its policy interest rate, which in turn affects the rates charged on mortgages and loans.
Schembri said the bank had benefited over the past 25 years from entrenched inflation expectations, which are currently being tested by tumultuous economic waters churned by the pandemic.
He said that maintaining and increasing public confidence is of vital importance to any policy action the central bank takes to keep prices – and by extension the economy – stable.
“It’s more than just a number. The continued achievement of our (inflation) target contributes to improving the standard of living of all Canadians, ”he said, according to the prepared text of his speech on Tuesday.
“When people and businesses are confident that they know what the inflation rate will be, they can make better long-term plans for their careers, their savings and their investments.”
The central bank is reviewing the framework for inflation targets before renewing its deal with the federal government for the next five years, as it has been doing since the early 1990s.
It is possible for the bank to choose a method different from that of the inflation target to serve as the basis of its monetary policy. Schembri said that among the options considered was to set a dual target for inflation and employment, or an average inflation rate over a period longer than one year.
Senior Vice Governor Carolyn Wilkins, the bank’s second in command, is expected to address an event the bank is hosting on Wednesday on alternative models to target annual inflation as measured by the Consumer Price Index.
This measure was undermined by a change in spending habits during the pandemic. Statistics Canada, which calculates the index by measuring the prices of hundreds of goods and services, found that people spend less on things that are more inflation-sensitive, like gasoline, and more on things that are more inflation-sensitive. less effect.
Adjusting those changes showed inflation could be very slightly higher than the headline reading, Schembri said in a question and answer session.
Research the bank conducted with Statistics Canada during the pandemic suggested that price increases are close to official inflation readings, even after accounting for differences in purchases based on household composition. level of income, education, age and tenants relative to owners, Schembri said.
Another problem that may be at play in explaining the perception gap from the measure is that consumers ignore improvements in things like electronics even as prices rise, he says, or when ‘they base their perception more on the cost of housing, which has risen sharply in cities like Toronto and Vancouver in recent years.
“This is why we are conducting this joint research with Statcan, because we want to better understand why … on average, consumers think the inflation they experience is different from what is actually measured by the CPI,” said Schembri during the question and answer. session.
“It is up to Statistics Canada and ourselves to better explain inflation and its determinants so… that we can close this gap.
Schembri ended his speech by saying that the central bank needs to communicate often, clearly and consistently to a broad audience to better influence price expectations and maintain its own credibility.