Core inflation revised after StatsCan backtracks

Statistics Canada backtracked on its decision to revise down estimates of underlying inflation, raising questions whether the agency has a full grasp of the real state of price pressures in the economy.

In a rare move, the agency said Monday it's reversing a methodological change — unveiled only five days ago — that lowered some readings of core prices. After receiving negative feedback from economists over the change, Statistics Canada said it reverted to its old methodology and will study the matter further.

The end result is an inflation picture that is more elevated than reported last week, at a time when investors are becoming more worried about global price pressures. The latest move pushed the average of the Bank of Canada's preferred measures of core inflation to a yearly increase of 1.8 per cent in January, from 1.5 per cent.

“It's unfortunate how events have unfolded,” Benjamin Reitzes, rates and macro strategist at the Bank of Montreal, said by email. “The magnitude of the revisions, both in size and time horizon, should have prompted further scrutiny from StatsCan before the release in order to ensure potential questions could be answered.”

Some investors and analysts have already begun to question whether underlying pressures are being measured properly, so any stumble from the federal statistics agency will be looked at in harsh light.

“We're now left largely in the dark on what core inflation is and reliant upon if and when StatsCan publishes a revision to its revised methodology that they just retracted,” Derek Holt, an economist at Bank of Nova Scotia, said in a report to investors.

Last week's reading showed core inflation was well below the Bank of Canada's two per cent target.

“We look forward to ongoing consultations with Statistics Canada to ensure the quality and relevance of the core inflation measures,” Bank of Canada spokesman Alex Paterson said Monday, adding the bank is “pleased” the agency changed course.

An email obtained by Bloomberg shows Statistics Canada apologizing to at least 20 economists and analysts for the inconvenience caused, saying the agency will require more time to properly assess the new methodology.

While inflation is expected to accelerate in coming months on higher energy costs, policy-makers led by governor Tiff Macklem see little immediate threat from rising prices, even with extraordinary levels of stimulus coursing through the economy.

Despite a temporary pickup early this year, the Bank of Canada doesn't anticipate inflation will sustainably return to its two per cent target until 2023.