Inflation and prices

• November 13, 1997

  Statistical measures of the trend rate of inflation

  Bank of Canada Review - Autumn 1997 Thérèse Laflèche

  As a guide for the conduct of monetary policy, most central banks make use of a trend inflation index similar to that employed by the Bank of Canada: the CPI excluding food, energy, and the effect of indirect taxes. In addition to their basic reference index, some central banks regularly publish statistical measures of the trend rate of inflation. The method used for producing these measures is, for the most part, based on the hypothesis that extreme price fluctuations generally reflect temporary shocks to the inflation rate, rather than its underlying trend. In this paper, the author offers a broad survey of studies on the measurement of trend inflation that have been published by the Bank of Canada and presents the results of the most recent work on the subject. Particular attention is paid to two statistical measures that the Bank follows more closely than other measures; namely, the CPIX, a price index that excludes eight of the most volatile CPI components, and CPIW, a measure that retains all the components of the overall index but gives a lower weighting to the most volatile.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices

• A Measure of Underlying Inflation in the United States

  Staff Working Paper 1997-20 Iris Claus

  A monetary authority with the primary objective of price stability has to distinguish between temporary price shocks and persistent shocks to the rate of inflation. A measure of underlying inflation, therefore, has an important role to play as a guideline for monetary policy.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices, International topics JEL Code(s): E, E3, E31

• Menu Costs, Relative Prices, and Inflation: Evidence for Canada

  Staff Working Paper 1997-14 Robert Amano, Tiff Macklem

  The menu-cost models of price adjustment developed by Ball and Mankiw (1994;1995) predict that short-run movements in inflation should be positively related to the skewness and the variance of the distribution of disaggregated relative-price shocks in each period. We test these predictions on Canadian data using the distribution of changes in disaggregated producer prices to measure the skewness and standard deviation of relative-price shocks.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices, Monetary policy framework JEL Code(s): C, C5, C52, E, E3, E31
• May 13, 1997

  Capacity constraints, price adjustment, and monetary policy

  Bank of Canada Review - Spring 1997 Tiff Macklem

  The short-run Phillips curve describes a positive short-run relationship between the level of economic activity and inflation. When the level of demand in the economy as a whole runs ahead of the level of output that the economy can supply in the short run, price pressures increase and inflation rises. This article reviews the origins of the short-run Phillips curve with particular emphasis on the long-standing idea that the shape of this curve may be non-linear, with inflation becoming more sensitive to changes in output when the cycle of economic activity is high than when it is low. This type of non-linearity in the short-run Phillips curve, which is typically motivated by the effects of capacity constraints that limit the ability of the economy to expand in the short run, has recently attracted renewed attention. The article surveys recent research that finds some evidence of this type of non-linearity in the Phillips curve in Canada and considers the potential implications for monetary policy.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Monetary policy transmission, Potential output

• Mesures du taux d'inflation tendanciel

  Staff Working Paper 1997-9 Thérèse Laflèche

  In this paper, the author calculates new measures of the trend inflation rate using changes in the components of total CPI; the hypothesis is that extreme fluctuations in certain prices reflect temporary supply shocks rather than any basic price trend.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices JEL Code(s): E, E3, E31

• La courbe de Phillips au Canada : un examen de quelques hypothèses

  Staff Working Paper 1997-3 Jean-François Fillion, André Léonard

  This study, which draws on a variety of research on price dynamics in Canada, examines some hypotheses that might explain the poor quality of recent inflation forecasts based on the conventional Phillips curve.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices, Inflation targets JEL Code(s): C, C5, C52, E, E3, E31