Pandemic widens gap between perception and reality on prices: BOC
OTTAWA Canadians believe that official inflation measures don’t reflect the rising costs they face, a senior Bank of Canada official says, with COVID -19 pandemic further widening the gap between perception and reality.
Some of that disconnect may have to do with changes in consumption patterns over the past six months as Canadians spent less on things like gasoline where prices are falling, and more on things like groceries where prices have gone up.
In a speech to the Canadian Association for Business Economics, deputy governor Lawrence Schembri said the perception gap on prices holds significant implications for the central bank, which for three decades has targeted an annual inflation rate of two per cent.
The comfort zone the bank sets for its inflation target is a key factor in determining its key policy interest rate, which in turn affects the rates charged for mortgages and loans.
Schembri said the bank has benefited over the past 25 years from well-anchored expectations for inflation, which are now being tested by tumultuous economic waters stirred up by the pandemic.
He said maintaining, and increasing, public trust is vitally important for any policy actions the central bank takes to keep prices — and by extension the economy — stable.
“It’s more than just a number. Achieving our (inflation) target on a continuing basis contributes to rising standards of living for all Canadians,” he said, according to the prepared text of his Tuesday speech. “When people and businesses feel confident that they know what the rate of inflation will be, they can make better longrange plans for their careers, their savings and their investments.”
The central bank is in the midst of a review of the inflation target framework before renewing its agreement with the federal government for the next five years, just as it has done since the early 1990s.
It’s possible for the bank to choose a different method than the inflation target to act as the foundation of its monetary policy. Schembri said among the options being considered include whether to set a dual target for inflation and employment, or an average inflation rate over a longer period than one year.
Senior deputy governor Carolyn
Wilkins, the bank’s second-in-command, is scheduled to address an event the bank is hosting Wednesday on alternative models to targeting annual inflation as measured by the consumer price index.
That measure has been shaken by a shift in spending habits during the pandemic. Statistics Canada, which calculates the index by measuring prices on hundreds of goods and services, has found that people are spending less on things that factor more into the inflation reading, like gasoline, and more on things that have a smaller effect.