The Bank of Canada said Thursday that its review of the monetary policy framework found widespread endorsement of keeping the 2% inflation target, but the consultations also exposed a marked disconnect between the official consumer price index and many Canadians' lived experience of prices.
According to the central bank, participants from communities across the country repeatedly raised worries about the rising cost of living. A common thread in submissions was that the CPI does not correspond with what people see when they shop, a divergence that the report says has weakened public trust in both the CPI number and the institution that uses it.
Canada’s annual inflation rate rose to 3.2% in May, the first time in nearly two and a half years that headline inflation moved beyond the Bank of Canada’s 1% to 3% target band. The bank attributed the increase in large part to higher crude oil prices linked to the Iran conflict, which pushed gasoline prices upward and helped lift the overall rate.
Governor Tiff Macklem, speaking earlier in the week, noted that food remains an area of concern for households, but that the recent uptick in inflation is principally tied to gasoline.
The consultations also highlighted political and generational pressures. The report says the cost of living challenge poses a problem for Prime Minister Mark Carney, who pledged to tackle affordability after his party secured a parliamentary majority in April.
Young Canadians who took part in the consultations said many have effectively abandoned hopes of homeownership. Those participants rejected the bank’s position that housing affordability lies outside its policy remit.
Several economists involved in or commenting on the review urged a stronger emphasis on rent inflation in the Bank of Canada’s research and communications. Most of the economists who contributed argued that mortgage interest costs should remain included in the consumer price index.
The Bank of Canada and the finance ministry conduct a joint review of the inflation target every five years; the next scheduled review is this year, the report notes.
Implications and context
- Broad support for the 2% target endures despite eroded confidence in how CPI reflects everyday prices.
- Energy-driven price pressures are currently the dominant factor behind the recent rise in headline inflation.
- Housing affordability and food prices remain salient public concerns that intersect with monetary-policy communication and measurement.