Desjardins Sees Bank of Canada Looking at How It Will Assess Underlying Inflation Going Forward

03:36 PM EDT, 10/02/2025 (MT Newswires) -- Over at Desjardins, Tiago Figueiredo noted today's address by Deputy Governor, Rhys Mendes, to the Ivey Business School in London, Ontario, was centered around how the Bank of Canada will assess underlying inflation going forward. Figueiredo said: "While this may seem like a bit of an overhaul on how policymakers monitor inflation, central bankers have been rolling out indicators for several years. As such, this change is not as dramatic as it may seem. Central bankers are adapting their tool kit to reflect the challenges that come with more frequent supply-based shocks."

Figueiredo added: "While we often view the average of the trimmed-mean and median as the gold standard, the Bank's 'preferred measures' are just a subset of the indicators that we and central bankers monitor. The overall distribution and drivers of inflation are key factors which determine what's seen as underlying inflation. Recently, measures excluding taxes have been in the limelight thanks to the GST/HST holiday late last year and early this year and the removal of the carbon tax. Judging from the comments today, policymakers are debating whether to expand, remove or alter the list of preferred measures. There is also a push to publish a new inflation dashboard in 2026, something that should help with transparency."

Deputy Governor Mendes, Figueiredo noted, floated the idea of excluding mortgage interest costs (MIC) from its current core measures. "The motivation is simply that this subcomponent of CPI is very slow moving and takes time to normalize. It also carries a heavy weight in the basket, just shy of 6%. In late 2024, an alternate measure like this would have been tracking closer to what central bankers believed was underlying inflation," Figueiredo said, noting the Desjardins measure on the average of the Bank's preferred measures excluding MIC corroborates this view. "Ultimately, the decision to exclude MIC from core measures is part of a broader discussion on how monetary policy interacts with imbalances in housing market. Governor Macklem had already alluded to this earlier in the year," Figueiredo added.

Figueiredo noted central bankers are also hard at work developing other indicators. In today's address, Deputy Governor Mendes introduced a new multivariate core trend measure, similar to what the New York Fed publishes. Figueiredo said the biggest drawback to this measure, and something that will matter greatly to the BoC, are it's similarities to CPI-Common. "Particularly, its vulnerability to revisions, an issue that ultimately led to the retirement of the CPI-Common measure earlier in the pandemic." He noted the speech also alluded to promising developments using other machine learning techniques.

Also, Figueiredo noted, the Bank of Canada may be reviewing how it looks at underlying inflation, but the 2% CPI target remains. He said: "That's not a surprise as they've pointed to this target as being critical to keeping inflation expectations anchored in the aftermath of the pandemic. Today's speech doesn't change much for us. Central bankers just offered more detail to what we thought they were already doing."

Figueiredo concluded: "One notable point was on rental inflation, particularly that "rental markets are softening, which should help keep inflation in prices for shelter services on a downward trend". Rent prices have been volatile lately and have put upward pressure on inflation. We share the same view that, with asking rents moving lower, rent prices should follow suit over the coming year. Ultimately, the information today reinforces our view that central bankers are likely to ease policy to a trough of 2.00%."

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