The Bank of Canada is changing its preferred CPI/inflation measure for basing its interest rate decisions
From an already complex set of core inflation, CPI trim/median/common
To an even more complex, 'broader' reading
Let's unpack this and the implications here:
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The BoC is focusing more on “underlying inflation”
The BoC says because interest rate changes take time to feed through (up to ~2 years), it must distinguish short term price swings from lasting pressure.
Reacting to short term noise can increase volatility
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The BoC acknowledges that while CPI trim/ median remain relevant, they can send misleading signals, especially with structural shocks (tariffs, supply chain disruption, housing/mortgage cost shifts...)
BoC is asking: “Can we improve our existing core inflation measures?"
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The BoC is cautioning that market participants may be placing too much emphasis on the 'preferred' core measures – when in fact the BoC sees underlying inflation as potentially different
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The BoC noted: “Expanding the range of indicators suggests underlying inflation remains around 2.5 %. This is below the 3 % level suggested by the preferred core measures alone.”
Because the BoC is signalling broader indicators, this changes how we interpret its decisions
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For example, headline CPI around 2 % might lull markets into expecting a rate cut, but if underlying inflation is still ~2.5 % and persistent, the BoC may hold or delay cuts. The BoC noted this exact scenario: headline ~2 %, core preferred ~3.15 %, but underlying ~2.5 %.
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But ultimately it gives the BoC more room to justify decisions to keep rates lower - or higher if it wants
It widens the guardrails of what an 'acceptable' rate is
A perfect setup for keeping rates lower for longer, allowing higher 'transtory' inflation
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Nov 6, 2025 · 2:55 PM UTC
