What is ‘core inflation’? This key figure could gauge future interest rate hikes

Economists say the Bank of Canada will keep a close eye on 'core inflation' on Tuesday when the latest Consumer Price Index is released. So what is it, and why does it matter?

Canada’s headline inflation rate is widely expected to slow again when the latest consumer price data for August is released on Tuesday, but economists say it’s the underlying “core inflation” figures that the Bank of Canada will be paying close attention to when figuring out how high interest rates will have to go.

Analysts polled last week by Reuters are projecting Statistics Canada’s consumer price index to cool to an annual rate of 7.3 per cent in August, edging down from the 7.6 per cent seen in July and June’s possible peak of 8.1 per cent.

Economists who spoke to Global News this week agree this figure, routinely called “headline” inflation, is likely to drop as gasoline prices continued their downward trends through last month.

But a Royal Bank of Canada report released on Friday projects that while the headline figure may have already peaked, so-called “core inflation” has not.

This figure, which in Canada is typically estimated through an average of three separate metrics, hit an all-time high of 5.3 per cent in July even as overall CPI slowed. RBC estimates core inflation won’t peak until sometime in the fourth quarter of the year.

RBC assistant chief economist Nathan Janzen, who co-authored last week’s report with Claire Fan, says the core inflation measures are meant to provide a “better gauge” of “persistent, underlying” price pressures.

It’s calculated differently across the world, but in general the metric strips out “volatile” items such as energy and food prices to provide a more reliable, long-term view of where inflation is heading.

Because food and fuel are routinely subject to global price pressures — the war in Ukraine and global supply chain kinks tied to the COVID-19 pandemic are a couple of timely examples — they aren’t affected much by the Bank of Canada’s interest rate hikes.