The Bank of Canada Is Misjudging Core Inflation

The Bank of Canada is misjudging core inflation. After CPI‑common was summarily dismissed during the pandemic, officials have relied heavily on CPI‑median and CPI‑trim when making policy decisions. The problem is that those measures have become biased, likely overestimating the true underlying inflation rate. After accounting for these biases, we find that core inflation has continued its downward trend and is now below 3%. This conclusion is consistent with a host of other indicators, but it’s in contrast to the Bank of Canada’s characterization of inflation. If the Bank of Canada ignores our findings officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses. Central bankers should consider bias-corrected versions of CPI‑median and CPI‑trim when taking policy decisions. Given the tightrope Canadian central bankers are walking, they can’t afford any missteps.