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The Bank of Canada is worrying about how to measure inflation:

While the official CPI data indicated potentially worrisome declines in consumer prices in the peak lockdown months – a 0.2-per-cent drop year over year in April, and an even deeper 0.4-per-cent decline in May – the newly developed “analytical price index,” as Statscan is calling it, showed a flat reading for April and a slim 0.1-per-cent decline for May. Still in deflationary territory, but just barely.

Deflation is a potentially catastrophic threat to any economy, so the CPI trend had definitely raised some antennae. It’s an especially big deal for the Bank of Canada, which relies on an inflation target of 2 per cent as its guide to applying monetary policy to help steer the economy to health.
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But during the lockdowns, some items in the usual basket have been unavailable or at least very difficult to buy (e.g. theatre tickets, flights abroad, sit-down restaurant meals, haircuts), while other items became a higher priority on households’ shopping lists (e.g. store-bought food, baking supplies, hand sanitizer). The normal CPI basket didn’t seem to apply; Statscan has been measuring the prices for goods that no one is buying, while under-weighting things that have dominated consumer spending.

The analytical price index – which essentially reweights the CPI to reflect the sudden and sweeping changes in spending patterns – does, indeed, reveal these distortions. While Statscan cautioned that the findings are “experimental,” and shouldn’t be considered a replacement for the official inflation statistics, they do support the views expressed by Bank of Canada Governor Tiff Macklem in a speech and press conference three weeks ago: that prices probably haven’t slid as deeply as the CPI suggests, but the reality is only modestly better.

The comments a few weeks ago were full of yield curve control … and the BoC is buying long bonds:

The BoC on Monday purchased $600-million of 30-year bonds in a reverse auction. The maximum amount had previously been $400-million, according to strategists.
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The 30-year yield jumped by more than 10 basis points – its largest increase since mid-March – last week when the government released its new deficit forecast.

The BoC appears “to be changing the composition” of its balance sheet to more closely match Ottawa’s preference for longer-term borrowing, said Andrew Kelvin, chief Canada strategist at TD Securities.

Investors will on Wednesday eye the BoC’s interest rate announcement, as well as the central bank’s Monetary Policy Report, the first since Tiff Macklem took the reins as governor, for changes to the bond-buying program.

This entry was posted on Monday, July 13th, 2020 at 7:47 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.