The gap between inflation perceptions and reality

Deputy Governor Lawrence Schembri discusses the difference between how Canadians perceive inflation and the actual measured rate. He explains why that gap may exist and what it could mean for monetary policy and the economy.

Our target is low inflation

Low, stable and predictable inflation helps Canadians plan how they spend and save their money. It also contributes to our economic and financial well-being. At the Bank of Canada, we have committed to a 2 percent inflation target. We use monetary policy to keep inflation as close as possible to this target over time.

People think inflation is higher than it actually is

We use the consumer price index to measure how prices change over time. But many people feel they are facing higher inflation than both what is measured and our target. This could be for a number of reasons. Consumers may:

• feel their buying patterns are different from the average basket of goods and services used to calculate inflation
• see prices rising on things like electronics and cars but don’t consider that the quality of those items has also improved
• notice the price of houses rising and factor that into their perception of inflation, but it’s the price of housing that is paid every year, such as property taxes and other services, that is used in inflation calculations
• base their perceptions more on prices that are rising than on prices that are falling

Why bridging the gap is important

We care about Canadians’ perceptions of inflation because their confidence in our ability to keep inflation low and stable helps us do our job better. When people trust the Bank to meet the inflation target, their beliefs and behaviours help keep inflation at the target by allowing the economy to stabilize after short-term bumps.

This is particularly important in times of trouble, like what we are experiencing now with the COVID‑19 pandemic. Because people’s inflation expectations are well anchored at 2 percent, our interest rate cuts have been effective in helping households and businesses get through these challenging times.

Communicating clearly and consistently about our inflation target and what we do to achieve it, as well as consulting Canadians to collect their views and opinions, is more important than ever.