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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