But when we looked ahead, we saw reasons to believe that underlying inflation would ease. For example, rental markets are softening, which should help keep inflation in prices for shelter services on a downward trend. And growth in inputs costs has largely normalized, which should help cool inflation in non-energy goods prices.
As you can see, a lot more than just our preferred core measures goes into our assessment of underlying inflation.
So, I’ve defined underlying inflation and explained how it differs from core inflation. I’ve also gone over some of the indicators we look at when assessing underlying inflation. Now let’s talk about the future—and the renewal of our monetary policy framework.
Underlying inflation and the renewal of our monetary policy framework
Every five years, we review and renew our monetary policy framework. These regular reviews are a strength of our system. They give us the opportunity to assess the framework’s performance, reflect on what is working well and consider whether our current approach remains the best one for the future.
As I said at the start of my speech, how we assess underlying inflation—including how we use measures of core inflation—is one of the themes we are looking at ahead of our 2026 renewal. Separating the signal from the noise is never an easy thing to do when it comes to inflation. But, in the current environment, it’s more important than ever.
As Governor Tiff Macklem has said, the structural tailwinds of peace, globalization and favourable demographics are turning into headwinds—and the world looks increasingly prone to shocks. More frequent supply shocks could mean more variability in inflation. So we need to think about how we assess—and talk about—underlying inflation as we confront this new reality.
Before I dive in, I want to be clear that this review is still underway, so I won’t have any definitive answers today. But I can share some of the questions we’re exploring on this theme, along with some of our findings so far. I will break this down into three parts.
First, I’ll talk about how we are re-examining some aspects of our current core measures. Second, I’ll discuss some new measures and methods we’re exploring as part of our broader assessment of underlying inflation. And third, I’ll explain some of the work we’re doing around how we talk about underlying inflation.
Can we improve our existing measures of core inflation?
I hope I’ve established by now that measures of core inflation are not the whole story, but they are an important element. With this in mind, we’re asking ourselves if there are ways we could improve our existing measures of core inflation.
Some of you have probably heard of one of the trickiest components of the CPI basket: mortgage interest costs. When we increase interest rates, we want inflation to come down. But when interest rates go up, inflation in mortgage interest costs also goes up automatically. And because many Canadians have fixed terms on their mortgages, renewal at new rates happens only gradually. So the effect on inflation can be persistent.
This poses a challenge because movements in mortgage interest costs can obscure the broader response of inflation to changes in our policy rate. It can be a source of noise.
Some of our core measures automatically exclude inflation in mortgage interest costs, while others have been designed to filter it out when its movements become extreme. While this is a good idea in theory, it hasn’t always worked out in practice.
Let me give you an example. After we started raising the policy interest rate in 2022, CPI-trim correctly began to filter out mortgage interest costs. But since it’s a relatively large component, its persistent exclusion limited CPI-trim’s scope to exclude other, more temporary, sources of upward pressure on inflation. Because of this, CPI-trim was 2.5% in December 2024, while an alternative version that pre-excluded mortgage interest costs was 2.1%. The alternative measure was far closer to where we thought underlying inflation was at that time.
One question we are asking ourselves is whether we should revise our preferred measures and our alternative measures of core inflation so they all pre-exclude mortgage interest costs. It’s something we’re considering carefully, particularly as we think about how monetary policy and imbalances in the housing market interact—which is one of the other major topics we’re exploring as part of our 2026 renewal.
Are there any new measures of core inflation we should look at?
Improvements to our existing measures are just the first part of this work. The second part is exploring new measures of core inflation. These would not necessarily be replacements for our existing core measures, but rather enhancements.
And we need to treat each potential new core measure like an MBA case study, asking ourselves whether there is a strong enough business case to include it in our already broad suite of indicators.
One measure that has gained attention in recent years is multivariate core trend inflation, or MCT. This measure isolates the persistent part of inflation. It then decomposes that persistent part into two categories: inflationary pressures that are common across many prices in the economy and those that only affect prices in specific sectors.
Initial results look promising (Chart 6). MCT appears to be effective at telling us when the persistent part of inflation is coming from common movements across many prices. This is important because we can address these broad pressures with monetary policy.
