Stephen Gordon explains why the spike of certain prices may not trigger interest rate hikes from the Bank of Canada:
The increase in the headline March CPI inflation rate is due to increases in a relatively small number of goods, and is best seen as a change in relative prices that will have only a transitory increase in the CPI. There are two ways that headline CPI can return to target. The first is that consumers adjust their spending patterns and substitute away from the goods whose prices have risen; the resulting fall in demand will bring prices back down. If this doesn’t happen, prices of other goods can fall — or at least rise more slowly — so that the rate of inflation of the broader index falls back to target.
The Bank of Canada is preoccupied with inflation, not fluctuations in relative prices, so the current increase in the CPI will only be a problem if firms and workers start using 3 per cent as a benchmark for increases in wages and the prices of other goods.
Even though the target is the headline CPI inflation rate, it is the Bank’s opinion that the core CPI inflation rate is a better predictor for future inflation. The components of core CPI are generally those whose prices are set infrequently and whose increases reflect expectations for future inflation as well as market conditions. If expected inflation starts to rise, it will be more visible in the core rate than in the headline number.
