Big Six bank sees something 'really wrong' from inflation data

Revisions to core inflation point to structural flaw in commonly used measure

Big Six bank sees something 'really wrong' from inflation data

Even as headline inflation in Canada is declining, the Bank of Canada’s preferred metric, core inflation, continues to rise – and one of the country’s biggest banks is sounding the alarm.

In note published following July's inflation figures, the National Bank of Canada said core inflation reached a three-decade high last month, reported Better Dwelling. The fact that this year's data have been updated three times, the bank said, suggests this indicator isn't as stable as the central bank thought it was.

Taking an average of the three core measures showed a steady increase in July – reaching 5.3%, the highest level in more than 32 years. Significant revisions to previous data led to the sharp boost.

The bank cited January 2022 data, which was initially estimated at a reasonably strong 2.3% in its February analysis. Stat Can increased January's core inflation by nearly a full point, from 2.9% to 3.2%, last month. In the bank’s August publication, January 2022 was once again changed to 3.6%, which is more than a point higher than the initial estimate.

“The cumulative revisions since the beginning of the year are nothing short of dramatic,” said the bank. 

Core CPI is expected to be far less volatile than headline, and it serves to highlight capacity pressures and excess demand. Because it felt that the economy was not yet operating at full capacity, the BoC played down headline inflation.

While they dismissed the odd situation as not apparent in core inflation, the changes indicate that Canada crossed the excess demand threshold in October. Quantitative easing (QE) was still being used by the central bank at this point, producing inflation.

The recent upward divergence in inflation, according to NBF's economists, "has challenged the statistical process the CPI-common is based on and made it a lot more volatile and less connected with other measures of core inflation."

They added, “Given this inherent weakness, we recommend focusing on CPI-Trim and CPI-median, which have proved better at capturing underlying inflation trends.” 

National Bank has previously explained that methodology modifications will continue to minimize inflation moving forward. The latest report, Better Dwelling noted, more clearly emphasizes that core inflation doesn't quite reflect what the central bank believes it does.