Bank of Canada Is “Discrediting” Its Own Inflation Research, Puzzling Economists : NBC

Canada’s central bank made an unusual move last month — it discredited its own inflation position. National Bank of Canada (NBC) deputy chief economist Matthieu Arseneau is “puzzled” why. In his latest report, he questions why the Bank of Canada (BoC) thinks its preferred measures overstate inflation. The economist took a dive through the data and found high inflation is very much a reality. He also can’t find any significant data to support why the central bank would conclude inflation is overstated. 

Bank of Canada Discredits Its Own Inflation Research

The BoC’s April Monetary Policy Review (MPR) said inflation data would be unreliable. More specifically, the three measures — CPI-trim, CPI-median, and CPI-common would be unreliable. Arseneau says, “last week’s imbroglio [embarrassing situation] over inflation in Canada comes at a bad time.”

The BoC previously said these are the preferred measures of inflation. In fact, they originally liked them to solve the current issues they have stated are occurring. Arseneau points to the January 2017 MPR. In it, the central bank said the three measures of CPI were superior because they minimized the impact of sector-specific shock in readings. They repeated this sentiment in 2019 again. 

In plain english, the BoC previously said we should ignore sector-specific shocks. This is when only parts of the economy are impacted by a downturn. It would be silly to treat the whole economy as though it were in a recession, when it’s just one or two specific areas that need help. This is like trying to hammer a nail into a wall with a bazooka filled with cash. Sure, it might work — but you created a giant mess, because you didn’t want to look for any other tools. 

No Reliable Data To Back The Bank of Canada’s Statements

The central bank stated the pandemic resulted in an overestimate of annual inflation. “Does that mean the measures preferred by the Bank since 2017 are inappropriate under current conditions?” he asks.  

Arseneau says CPI-trim would overestimate “if a large number of components initially fell sharply and then recovered gradually.” That’s what the BoC is implying happened. That’s not what NBC found when running the actual numbers.

“What’s he [Macklem] referring to here?” he asks. The bank looked at 55 components, and its economists were “puzzled.” They only found four components to show a large drop, and slow recovery: rental housing, fuel oil and other fuels, gasoline, and the use of recreational vehicles. Those are the four nails the bazooka is out for, apparently. Other than that, there’s not much else in the index with an annual growth skew.  

“In our view, the Bank of Canada should not be overemphasizing sector-specific shocks which may be temporary,” he said. “It is ironic in our eyes that the central bank is discrediting the core inflation measures it has favored since 2017 for one of the reasons that led it to favor them.”

Inflation Is Running High, and It’s Not Due To A 12-Month Data Skew

The bank found it “surprising” the BoC is wondering what the numbers look like, when the data exists. Statistics Canada (StatCan) only shares the 12-month changes of the CPI indexes. However, NBC reconstructed the CPI measures “exactly” using StatCan data. This allows them to look at more recent growth instead of just the pre-prepared annual rate of change. 

The bank found in March, CPI-median increased 2.7% over the past 3 months when annualized. CPI-trim increased by 3.0% annualized over the period as well. In other words, the acceleration is recent. It has little to do with the 12-month change. The bank urges the BoC to “acknowledge that sector-specific downturns have fortunately had little disinflationary effect on the economy as a whole.” 

The bank acknowledges unprecedented times require a deeper dive into the numbers. However, the monetary system of one of the world’s largest economies needs to run on data. “In our opinion, the BoC needs to provide more compelling arguments than those presented in a simple box with no reference to staff research on this matter to convince us that it is time to look to alternative measures of inflation.” he said. 

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  • Ahmed 3 years ago

    Watching the Bank of Canada stumble through this is kind of embarrassing. If you’re going to lie to the public, at least make it believable. We all know this is about keeping home prices high.

    • GTA Landlord 3 years ago

      and to support federal and provincial spending. It a win-win for governments that prioritize donor handouts and higher home prices.

  • Ali 3 years ago

    Can someone explain the 3-month annualized part for those of us that aren’t as economically versed? Thanks in advance.

    • M.Bury 3 years ago

      Something “Annualized” is generally like this…

      There are four 3-month periods in a year (4 x 3 = 12). Just multiply the 3-month rate by 4 to get the annualized rate. Sometimes there are seasonal adjustments or some other factor applied, but this is the general concept.

      I’m sure somebody on here could explain it more specifically.

      • Naz 3 years ago

        The method you suggested for calculated an annualized rate gives an estimation that works in certain cases. The correct way to find an annualized rate is to raise the term rate to the power of the number of terms that exist in the overall (annual) duration.

        Example a quarterly rat of 3% will yield an annual rate of: 1.03^4-1 = 12.55%

        In the example here you can see that the actual annualized rate 12.55% is close to you estimate but it is not exactly the same. This deviation becomes bigger if the term rate is bigger, or if for the same rate you have more terms (like a monthly rate of 3% vs quarterly rate of 3%)

        Example: monthly rate of 3% annualized is: 1.03^12-1 = 42.57%
        If we use the multiplicative approximation you get 3×12= 36%
        Big difference

        • Naz 3 years ago

          Actually just to be clear M. Bury annualized definition is not wrong, it just doesn’t take into consideration the compound effect. The method I showed takes into account compounding. Both measures are used indifferent context. The APR of the credit card for example does not take the effect of compounding into consideration.

  • Holton 3 years ago

    Look, this time the entire world printed tons of money. Thats why smart people bought real estate in the past year. Real estate is the only reliable way to combat inflation. If the worst pandemic in 100 years didn’t drop prices what will? The government should not have propped up prices with blanket mortgage deferrals last year. They should have let prices drop. Now its too late, the entire world is recovering and seeing inflation. This is the worst time to sink your economy because that would mean no economic recovery for decades.

    The only sensible thing to do now is let inflation increase faster than housing price for a decade. This will make housing cheaper in relative terms. Government should focus on wage growth now and let inflation rise.

    • Trader Jim 3 years ago

      This is exactly what happened in the 1980s, and real estate did not in fact control inflation.

      I’ve noticed you make this same comment every single day, but fail to acknowledge this investment thesis of printing has never worked.

      • Smaug 3 years ago

        One must assume Holton has personal financial motivations for his preferred policy of letting inflation run hot. Like many armchair (and some professional) economists, he seems to view inflation as a benign force that can be used to bring about a desired outcome. In fact, inflation is a malignancy that has far-reaching consequences, none of them good.

        More to the point, inflation does not rescue debtors by inflating their debt away. Because lenders aren’t stupid and aren’t in the business of allowing their assets (i.e. their loan book) to be eroded. They’ll charge higher interest on that debt – over and above the rate of inflation – as mortgages are renewed, and then many debtors will be in trouble. If they can’t do that, they’ll reduce lending. Because banks don’t exist to lose money.

        Inflation is not a gentle, stable, linear process. It’s messy and creates winners and losers, just like any other economic phenomena. Even if average wages overall keep up with inflation, not all wages will. Some salaries will leap ahead of inflation while others fall far behind. Those indebted homeowners whose wages do not keep up with inflation will not be able to handle the higher interest rates. It doesn’t take too many of those to change the dynamics of the housing market entirely.

        • Doomcouver 3 years ago

          Spot on comment. Some people like this Holton guy like to paint inflation as some sort of panacea for our economic problems. As we saw in 1971-1974, and 1976-1981, inflation can manifest very quickly, and once it starts to ramp up, the pro-cyclical momentum it generates takes extremely aggressive rate hike policies at central banks to tame it.

          Like you said as well inflation won’t solve your average Canadian’s debt problems as retail banks will detach their mortgage rates from the BoC rate at some point. Inflation pushes up long term bond yields, bond yields rising pushes up mortgage rates. The bank of Canada doesn’t have the ability to inflate away your massive mortgage for you.

      • Axel McLion 3 years ago

        Yes, this Holton guy posts the same flawed thesis daily and never responses to criticism of it.

    • Ashley 3 years ago

      If housing prices are a direct correlation to inflation then as per your argument the rise in house prices last year is a pure play of speculation and corruption.
      Now the question really becomes not about inflation but how much more speculation and corruption is required to support the prices.

    • Joseph 3 years ago

      It’s fine to say `let inflation increase faster than housing price’, but the cost of living is influenced by more than just house values. At the rate house prices have jumped in the last five years, specifically in major urban centers, but now increasingly infecting rural regions outside these centers: one may be able to afford keeping a roof over their heads, but starve, freeze, and remain home bound because everything else essential to life is through the roof (no pun intended). The belief purchasing a home 5x over its real value, as a hedge against inflation, is proven time and time again to be a falsehood. The many housing boom and bust experiences of the past decades is testament to this!

    • Paul 3 years ago

      No economy has ever successfully succeeded at the beautiful deleverage. Mostly because of those people who created the bubble with their greed. Just read about Hyman Minsky. No business cycle. Just a credit or debt cycle whose last stage is a Ponzi scheme. How else would you describe what is going on?

    • D 3 years ago

      lol 😂 most of those smarty pants but on credit with a mortgage. There will be no hyperinflation, you will never pay off your home.

  • Greg 3 years ago

    It shows that the bankers are scared so they go full throttle without any evidence that it is the right thing to do.

  • Some dude 3 years ago

    Over time, the victims of this lie will come to be in control.

    BoC staffers can not afford homes and are suffering the ravages of inflation, why would they continue to ‘push the lie’ that their boomer predecessors could comfortably do? They will start to publish the real data. The inflation calculator is fake news.

    MP’s and MLA’s and all elected officials are unable to afford homes, why would they continue to ‘push the lie’ that their boomer predecessors could comfortably do? They will start to legislate against the manipulative laws that have skewed the housing markets economics into unrealistic territories.

    As the lazy, incompetent and comfortable boomers retire, and no longer spend their entire days on Expedia booking travel and vacations, real people trying to build real lives will fill the positions and reduce the by-design formulated hardships that are currently programmed into the system.

    Or is it true, that the economy has become so inefficient and incapable that we are no longer able to achieve reasonable production levels? Canadians are stupid.

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