THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, November 20, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:15 p.m. [ET] to examine and report on Canada’s monetary policy framework.
Senator Pamela Wallin (Chair) in the chair.
The Chair: Hello to everyone here in the room and those joining us online. Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as chair of this committee.
I’d like to introduce the members of the committee with us today: Senator Loffreda, the deputy chair; Senator Gignac; Senator Ringuette; Senator Varone; and Senator Yussuff.
The committee is studying the mandate of the Bank of Canada and Canada’s monetary policy framework. Today, we have the pleasure of welcoming in person for our first panel Dr. Jacqueline Best, professor at the School of Political Studies, University of Ottawa, whose work has focused on the inflation of the 1970s and 1980s — some of us actually remember that — as Canada faces this affordability crisis, and she also looks at whether the tools at the disposal of the Bank of Canada are effective in dealing with the situation.
Dr. Best, I understand you have some opening remarks, and the floor is yours.
Jacqueline Best, Full Professor, School of Political Studies, University of Ottawa, as an individual: Thank you, Madam Chair.
[Translation]
I’d like to begin by thanking you for the opportunity to testify as part of your study on Canada’s monetary policy framework.
[English]
Much of my research is, as the chair mentioned, on the history of monetary policy and financial governance, particularly in the U.S., the U.K. and, to some extent, in Canada. What this research has taught me is that we are not in the Great Moderation anymore. This is the label that we give to a period of relative macroeconomic stability in the 1990s through to the 2008 global financial crisis, an era of low inflation and relatively few economic crises. Unfortunately, as much as we would like to return to that era, I think we have a lot more in common with some of the challenges of the 1970s and 1980s, an era of instability and of economic and political shocks.
It also seems very likely that we will continue to live in a highly uncertain global environment in the coming years. If we look at trends in geopolitics, and, for example, the climate crisis, this heightened uncertainty requires more creativity and discretion from economic policy-makers, including central bankers. That discretion, in turn, requires more robust forms of political accountability.
I want to be clear. The Bank of Canada has an excellent reputation, which is well deserved. I think it punches above its weight in international policy-making circles, and it has dealt effectively with some very significant shocks in recent years. But there’s still room to improve. The Bank of Canada is still behind its peers in terms of international best practice in three key areas: governance, transparency and its mandate. I’m happy to elaborate on these areas in our conversation today, but for now I’ll just close by noting that I think reforms in these areas will provide the Bank of Canada with the accountability that it needs to sustain confidence and build trust as we negotiate the challenging times ahead.
The Chair: Thank you very much. That gives us a lot to go forward with.
Senator Loffreda: Thank you, Ms. Best, for being here with us.
I’ll take you up on your opening comment. You said the Bank of Canada punches above its weight but is behind when it comes to international best practices with respect to governance, transparency and mandate. Can you elaborate on that? What is required to maybe increase confidence and trust? I always say trust is the currency of every relationship, and we all want to trust the Bank of Canada. How can we increase that trust?
Ms. Best: Thank you, excellent question. I’ll take those each in turn.
On governance, best practice would be to rely not just on internal members, as we see now on the governing council, but to bring in outside expertise. We see that in many other countries in the global north: the Federal Reserve bank, Bank of England, Australia, and New Zealand, and one can continue. That has become the norm. Also, having a system based more on voting rather than a consensus-based system, as we see at the Bank of Canada, makes a lot of sense.
We have to come up with a system that makes sense for Canada, and it’s going to be its own system, but I think the British practice of having an annual remit is an interesting one to look at. That’s a term they use where the government says annually, “This is your mandate, this is your inflation target, this is what you should be going at and these should be your priorities,” and then the Bank of England has operational independence to figure out how they’re going to achieve that. If they don’t achieve that within a certain margin, they have to come back with a letter explaining what happened. Those are all ways they can retain that autonomy, but, at the same time, they build in more forms of accountability and more spaces for conversation.
On transparency, we have seen important moves from the Bank of Canada. I was particularly heartened that, after the IMF review of bank transparency, they started publishing summaries of their conversations about interest rate decisions, and that was an important move. Certainly, if we have a system where you have external members, votes and publish fuller minutes, as you do after a delay in the Federal Reserve, I think that would make a lot of sense.
Finally, on mandate, I think that a number of central banks are now being more explicit about including growth and employment as well as inflation and price stability in their mandates. We see that in a number of different forms. Even with the Bank of Canada, in their last review that I looked at, there’s a little more space to take employment into account now. But it is worth having a conversation about having a formal dual mandate. That is something worth considering, as we see, for example, with the Bank of England and our friends to the south at the Federal Reserve bank.
Senator Varone: Thank you for being here with us today.
I was quite interested in terms of one of the items that you’re studying, which is blind spots in the international political economy. I won’t talk about that, but the phrase “blind spot” hit me. When I was reading all of the material on CPI, CPIX, CPI-trim, CPI-median, CPI-common, and then you talk about blind spots, I thought about shrinkflation. Everything that you buy at the grocery stores today — from toilet paper to boxes of cereal, pasta, muffins at Tim Hortons — shrank. Is it a blind spot for Statistics Canada, for the people that calculate the rate of inflation? I didn’t notice, but what I was buying was less, but you pay the same. You used to get volume discounts for big purchases; now you pay the same and get less. How do you interpret that?
Ms. Best: That’s a great question.
It is interesting. You’re pointing to the fact that we have a number of different measures for inflation, and there’s also a tendency to keep changing them over time, partly because, in retrospect, we’ll say, “Oh, I think we missed that.” Not just the Bank of Canada but pretty much every central bank around the world missed the fact that the post-COVID inflation was not transitory. Again, in retrospect, they said, “What did we miss? What did our data not show us?” There are always choices about what to include or exclude.
The question about shrinkflation is a great one. I’m not sure how you would go about it. It would seem to require a much more detailed examination of that basket of goods to figure out how big the basket actually is. Is the basket shrinking, even though we call it the same thing?
Thinking about people’s lived experience of inflation and how we can calculate and capture that better is an excellent question.
The Chair: Just to follow up on the question of what we missed and the transitory nature, we’ve spoken about that with the governor as well. When they look at the inflation factors — and we raise this every time — they leave out some pretty powerful things, like home heating oil and transportation. These are key things that would maybe have given us a clue that this was not transitory.
Ms. Best: This is always a challenge. I know the European Central Bank was having debates about this because their current measures don’t include mortgage rates. Again, people were saying, “How can you calculate inflation when that portion of what they’re paying has grown so dramatically?” I understand the methodology behind it. In some sense, there are some things you’re going to be capturing and some things you can’t. Also, with some of these other core measures, you’re trying to minimize volatility, but, at the same time, there’s no question.
This is why you see quite a few central banks, and I think the Bank of Canada is among them, try to do surveys, have conversations and get data that is not simply about these numbers but also look behind the metrics to get a better feel for what is going on on the ground, and I think that makes a lot of sense.
The Chair: I’ll come back to that a little bit later on.
Senator Yussuff: Ms. Best, I guess I have a couple of questions about the bank’s mandate. The bank has been given a club, essentially, to club inflation. The club is a very blunt instrument to deal with a problem that quite often is more complex. The bank has only one tool — jack up interest rates, shut the economy down or slow it down long enough. You put a lot of people on the unemployment line, and maybe you get inflation under control. It will drop prices, because, of course, demand is not there.
It seems to me that in the 21st century, the tools given to the bank seem so archaic, given the challenges and the reality of the times we’re living in. If we are thinking about a new mandate for the bank, it would seem to me that the mandate to simply focus on 2% or 3% inflation, with a club in hand to get there, is not a sophisticated way for an economy to function, whether it is here in Canada or looking at other experiences around the world.
What would you provide if you were rethinking this model? What do you think should be part of the model compared to what it is right now? With what it is right now, most consumers and Canadians are very frustrated, because it doesn’t work, or at least they believe it doesn’t work in their self-interest.
Ms. Best: I agree. It is a blunt instrument, and it’s a relatively narrow set of tools. We saw them getting creative in the context of potential deflation and creating new tools, but in the context of inflation, it’s still largely about interest rates.
In reality, whether we’re tackling inflation or deflation, it’s more than simply the central bank’s job. One of my takeaways from the 2008 financial crisis onwards was that we seemed to be putting a lot of weight on and relying often too heavily on the central bank to do a lot of the heavy lifting, when, in fact, it is a collective and collaborative undertaking. The government has to do some of the work, and the bank has to some, whether it’s about inflating an economy that is in crisis, as we saw with COVID, or whether it’s trying to get a handle on inflation.
In fact, in the recent context, for a lot of the work getting the inflation down, if you look at studies, for example, the Bernanke and Blanchard paper, it looked like it wasn’t monetary at all — going up or coming down. A lot was driven by supply side factors, energy, in particular, and how that flowed through into food prices and so on. Obviously, if what is driving inflation is not just monetary, then you can’t have a policy that relies so narrowly on interest rates, because, ultimately, those sources of inflation or deflation are not going to be particularly responsive.
Senator Yussuff: Given the important role the bank plays in stability and confidence in the economy, we want the bank to be effective. In that context, don’t you think we do a disservice to the bank, recognizing that we’re giving them this overblown responsibility when they have very limited options as to how they can manage the challenge they face? The economy needs some confidence, but Canadians need confidence in what is going on rather than feeling they’re being punished for things they don’t have anything to do with.
Ms. Best: I agree. Having confidence in the currency, first of all, and second, in the central bank, is absolutely essential. I think with the Bank of Canada, like other public institutions, we’re in an era when we’re dealing with a crisis of confidence or declining confidence, and that is a challenge.
Senator Yussuff: Are there other jurisdictions we can learn from?
Ms. Best: I think about being more realistic about the mandate, because even central banks that have a very narrow mandate are looking at more than just price stability. This is a question we asked ourselves in the current crisis. We didn’t end up facing it because it looked like we were getting a soft landing. But people said, “To get from 3% to 2%, are you willing to completely destroy the economy? Are you willing to put that many people out of jobs?”
That did happen in the 1980s. They were willing, in fact. Paul Volcker was willing to just let those rates go up and up. We were talking about mortgages of 24%. If you talked to anyone about that today, can you imagine what that would look like? In the current context, it’s hard to imagine a central bank being willing to do that. Even if the mandate is price stability, they have to be responsive, to some extent, to ensure that the economy as a whole doesn’t fall apart.
Yes, let’s broaden that mandate, and let’s consider what needs to be in that mandate and be realistic about that. At the same time, an issue actually came up, and it was originally part of the conversation about the last mandate review, but in the end, it wasn’t really central at all or discussed in the final report, and that is the idea of some form of coordination between fiscal and monetary policy. That was initially on the table. Again, it’s quite clear that to get out of the COVID pandemic, we had monetary strategies, but we also had fiscal strategies. These two things usually have to go hand in hand, and if they work at cross purposes — whether it’s in inflationary or deflationary — we have a problem. For example, after the 2008 crisis — 2010 onwards — most G7 and G10 countries moved from stimulus to austerity, so we had contraction on the fiscal side, and that meant the only game in town keeping that economy going was the central bank. You had incredibly low interest rates, but we now see that had perverse consequences in terms of fostering asset bubbles, housing market bubbles and intensifying inequality and so on. Again, having those two in conversation and working more in tandem is another part of ensuring that kind of confidence.
Senator Ringuette: Thank you for being here. You’re very enthusiastic about the knowledge that you have, and we appreciate that.
One of the issues that you mentioned was that the British bank gets an annual mandate from the British government.
Ms. Best: It is a remit. They call it the remit, yes.
Senator Ringuette: We review the Bank of Canada mandate every five years.
Ms. Best: Yes.
Senator Ringuette: I see advantages to the five-year term, because it provides the institution the ability to have an impact on the short, medium and long term, and it also removes the arm of politics from the central bank. Could you elaborate on that? I find a one-year mandate dictated by government is quite short. It’s very political, as far as I could see. Maybe five years is too long a mandate, so maybe three, but one is — wow — it’s like the other end of the spectrum.
Ms. Best: I think it’s important to differentiate. The remit is a much narrower conversation about what priorities to keep in mind over the next year.
I actually think the Canadian mandate review is fantastic. I agree that the five-year term makes a lot of sense, and it’s actually an area where we are ahead and we have been a leader. I did a study looking at the mandate review in Canada but also the policy strategy reviews in the Federal Reserve and the European Central Bank in around 2020-21, which happened at the same time, and it’s quite clear that the Federal Reserve partly looked at Canada initially for inspiration, and we’re seeing a number of other central banks saying, “We want to, at regular intervals, do a mandate assessment.” To be clear, with the other central banks, it was a policy strategy review. They were not formally reviewing their mandate, and there was less on the table than there was in the Canadian context. But the idea that this is something that just happens regularly, I think is excellent, and that’s an area where Canada is ahead.
On the other hand, what I like about the remit is it’s much narrower, but it does give a chance for each year — it has that kind of sense of the government saying, “Within the context of your existing mandate,” which is set out and which rarely changes, “these are our particular preoccupations,” and starting that conversation. They also have a Monetary Policy Committee, and they have a number of other institutionalized ways in which there is more exchange between Parliament and the Bank of England. Of course, it’s worth remembering that the Bank of England only became independent in 1997, so it is also an institution with a very different history.
Senator Ringuette: When the Bank of Canada appeared before us as a witness, they indicated to us that no, they do not work in isolation and that they have regular meetings with the Office of the Superintendent of Financial Institutions, or OSFI, and with the Department of Finance and so forth. They don’t really work in isolation. There is an ongoing conversation that seems to be happening. Should it be more formalized?
Ms. Best: I don’t think that would hurt. This is very Canadian, I’ve come to realize. For example, we don’t have formal policies or a system that is very visible around macroprudential regulation and around systemic risks. At the same time, we do, clearly, have macroprudential policies. The Canada Mortgage and Housing Corporation, or CMHC, is probably the most important one that says — because most of our risk comes from the housing sector. There is a committee, I understand, but, again, we don’t know much about it. This seems very Canadian. We know these things are happening, and they often work quite well. We didn’t suffer from the 2008 crisis partly because there were a lot of conversations behind closed doors.
On the other hand, I don’t think it hurts to bring some of that into the formal and bring some of that more into the open, again, in terms of building confidence, so that we know, in fact, that these conversations happen and we understand how they happen, how frequently and what the goals and principles are and so on.
Senator Gignac: Thank you to the witness, and thank you for your opening remarks. It was exactly in line with my colleague and this previous conversation.
Right now, monetary policies cannot do everything. They can be limited. When we have external shocks, like a supply shock, macroprudential measures could work much better, but that’s under the Finance Minister’s umbrella right now. Contrary to the United Kingdom, for example, it is there, so it’s about governance.
You talk about governance and currency mandate, and you mentioned improving transparency. I found the Bank of Canada has improved in the last few decades, but external members and votes could be nice. Quite frankly, is that possible? Is it realistic to have that without changing the governance? The Governor of the Bank of Canada is the chair of the board of the Bank of Canada, and there are deputy governors. Is it realistic to believe that you could have a disclosure on the votes from the governors? It’s hard to believe, and maybe we need more external governors. At the end of the day, the process is the governor is our external governor, contrary to the Bank of England, which is parliamentarians who decide about the external governor.
Here is my question: Do we have to address the governance aspect in our study? If we want to improve the transparency and even the mandate, do we have to address the governance of the Bank of Canada? That could mean refreshing the current law of the Bank of Canada, which is pretty old.
Ms. Best: It is remarkably old.
There are many models out there. The Bank of New Zealand and the Reserve Bank of Australia have gone through refreshes and have rethought this. We don’t just have to, for example, look at the Federal Reserve. We, as Canadians, do tend to look a little too often just to our neighbours to the south, and, of course, they are so different from us in so many ways, and we can’t really compete. They are who they are; we are who we are.
I think we can look at these other models, and yes, ideally, with changes to transparency and rethinking a mandate, we also do need to look at governance. There are a variety of models out there. There is going to be one or some combination that we can build on that provides those external perspectives. I think they’re important. As I said, in a context of extreme uncertainty, there’s rarely one path forward.
Now, the Bank of Canada has given itself some flexibility. It says, “We’ll have a target,” but it’s in the medium term. We can take different paths depending on how we want to assess and compensate for other factors. I think that makes a lot of sense. As I have said, they need discretion to cope with crises, but the more discretion we give an unelected body, the more we have to think about who is making those decisions and how we ensure that we are comfortable that they are accountable to us, and not by politicizing in the sense of making it a partisan game. There are concerns that I would agree with Senator Ringuette on that. We don’t want this to become a political football, absolutely not, but we do want to ensure that those conversations are full and frank and bring a variety of different expert perspectives to bear. There are some good models that we can look at.
Senator Gignac: On the mandate, do you believe that, at the end of the day, it does not make a big difference whether it is a dual mandate or the current mandate? If I understood correctly what you said, they already factor the labour market into their decisions, or maybe I’m not understanding.
Ms. Best: I think they do.
For example, the ECB has a single mandate, but then they can do whatever else is necessary to pursue their objectives as long as it is consistent with the mandate. That is not uncommon as a kind of workaround.
I still think that having a formal mandate, putting it out there and being very clear, is worth doing. It provides consistency and clarity. It also ensures that we don’t end up with policy that is lopsided simply towards price stability and not taking adequate account of growth and unemployment.
Ultimately, I do think the best way forward would be a dual mandate, but there are compromises or alternatives that central banks have drawn on that we can draw on if there isn’t the political will to go as far as a dual mandate. But that would be my preference.
The Chair: I have a kind of chicken-and-egg question here with the governance idea when it comes to voting versus consensus. The governor is the chair of the board. They are appointing other deputies, but those are in-house appointments. There is no other imprimatur on them. How would you see that working? Would some votes be more powerful than others or weighted? How would that happen?
Ms. Best: I have spoken to members of the Bank of Canada. I do believe that they have robust conversations, and it is not entirely top-down. It probably also depends governor to governor what the culture is. I think there is a reasonable conversation.
Ultimately, it is worth looking at models, not necessarily going all the way to what they have in the U.S., but looking at models where there is a conversation and a vote and where you have representatives who are chosen for a long enough mandate so that it is not highly political but who come in and bring those perspectives. You structure that conversation. There are different ways of doing that, but it is worth finding a mechanism for bringing those voices in.
The Chair: In the end, it would be a numbers count in that sense.
Ms. Best: Yes. I’m quite sure good decisions come out of the consensus model, but, at the same time, it overstates the coherence. In fact, there are different issues that are being weighed and different views, and it is fair to Canadians to be able to see those different views.
The Chair: This would be more reflective of that and give the public some sense that there was debate.
Ms. Best: There was a genuine debate.
Senator Loffreda: I want to question you on the general framework and maybe elaborate on that. We have been discussing it. How would you evaluate the effectiveness of Canada’s current monetary policy framework in achieving its dual mandate? We talked about dual mandate, but it currently has a policy framework dual mandate of price stability and economic growth. Where would you highlight the systemic gaps or limitations?
Canada’s inflation-targeting framework has been in place since 1991. Is it adequate today in the current global economic environment? We have rising debt levels. We have financial instability. We have climate risks and supply chain disruptions.
What are your views on the balance between the central bank independence and accountability? Has the Bank of Canada’s approach been effective in maintaining the public trust and transparency, which I said from the beginning is key?
Ms. Best: Absolutely.
They have walked a difficult line, and they have certainly done their best. As you say, we have a system in which the Bank of Canada is accountable through certain measures, and certainly the regular five-year mandate review is one of those important pillars. From what I understand, the treasury plays a role. The research is done by the Bank of Canada, but there are important conversations around that. Again, having a more transparent system with clear governance parameters set up and a clear formalization of that mandate would all go towards increasing the trust in that institution.
This was perhaps less important during that Great Moderation when you had far fewer economic crises, inflation was much lower and the models seemed to work. The economy looked a lot like the models. One of the reasons I say the current era looks more like the 1970s and 1980s is that crises seem to have become the new normal and we keep jumping from one unusual experience to another. Central banks have to be more experimental and creative. I’m appreciative of the fact that they have found tools and strategies, but at the same time, that does require a more robust set of accountability mechanisms while retaining that operational independence.
Senator Loffreda: With interest rate hikes to fight inflation, are you not concerned with economic inequality, household debt and financial stability? We are all very concerned with inflation, but is increasing interest rates the best tool at this point in time? The wealth gap is getting larger and larger. Canadian debt level is increasing daily. What are your thoughts on that?
Ms. Best: I teach some of this stuff in my class too. These are things that we worry about.
If you look at some of the data on where consumer debt levels are compared to, for example, the U.S. at the moment, these are very worrying, so, absolutely, the Bank of Canada has to pursue these goals in a way that keeps account of what the impact is on the housing market and what it will be on financial stability, which we haven’t talked about very much. That is also an interesting potential tension.
Are interest rates the only tool? Absolutely not. Do we have to pay attention to how they impact these dynamics? Absolutely, yes. This is, again, why I think the job is incredibly complex. I’m very glad I’m not in that position and didn’t have to go through that. First, you had the 2008 crisis and then the COVID pandemic. These have not been straightforward times.
The Chair: Exactly.
Senator Varone: A few weeks back, we had both the Governor of the Bank of Canada and the deputy governor, and then the following day, the Office of the Superintendent of Financial Institutions, OSFI. A lot has been said about governance, independence and accountability, and they both talked separately about staying in their own lanes — Bank of Canada governs interest rates, and OSFI governs the subset of mortgage rules they are under. With this affordability crisis hitting us between the eyes today, there is a lot of political discussion about easing the amortization schedules to allow the interest rates to be tempered for people who have to renew their mortgage. And then came the bombshell: Carolyn Rogers comes out and says that we need to resist the temptation to try and solve housing affordability by tinkering with mortgage rules. That blew me away because she is not staying in her lane. If this is a collective effort where everybody has their interdependence, why is that statement being made? Can you comment on taking the wind out of the sails of the political discussion to help Canadians afford their renewals down the road? I get confused by this.
Ms. Best: I get confused by the Canadian system too. It is so complex.
I look at the Bank of England. The Bank of England was responsible for financial regulation, and then that was removed right at the same time it became independent. The FSA was created. Then after the 2008 crisis, they realized that had really not worked at all, because no one knew what the other side was doing, and this actually slowed down their response to what was, for the U.K., a massive crisis. They had a much worse crisis than we had. So now they are back together again. The Bank of England is doing financial regulation. These are interesting questions. Is it one player? Is it two? How do you coordinate? In Canada, we also, of course, have a federal system, and this complicates it even further.
This question of staying in your lane makes a lot of sense at one level, and yet in practical terms, each of these policy decisions affects the others. Of course, they are having to negotiate these complicated relationships, and if one actor does this, it is going to have an impact on what the other governing institution does. I’m not sure what the best answer is. Many institutions in many countries do face this, but I think in Canada, it takes a very particular kind of form.
Senator Yussuff: I want to come back to what has been troubling for me. As we were dealing with high inflation, the number-one obsession was to try to temper wage growth in the context of inflation, and, of course, the contributing factor for inflation was prices. The spotlight was almost limited in how it got focused, and it was prices that increased in a dramatic way to the point where people are just, “Hang on, are you not criticizing the people who are profiting from this?” We are actually telling the workers, “You need to take less because somehow it is your fault, and don’t ask for too much because you might drive inflation even more.” Well, workers have to pay their rent, and they have to look after their families, but yet the obsession with the financial institution was to say let’s try to dampen wages and demand. How do you explain this contradiction when the whole principle is that you are supposed to try to keep the price from escalating to the point where it generates inflation in the country?
Ms. Best: Well, this comes back to the blunt instrument of interest rates. If you have a hammer, everything looks like a nail.
There is a history of focusing on wage-price spirals. That was the big focus certainly in the 1980s, and, again, the data on that are not clear, and there has been some interesting studies about how often you end up with an actual wage-price spiral. In this case, that was the big fear, and maybe that is partly because, in fact, if prices are the problem, then the solution — if it is supply driven or if it is pricing by businesses, for example, the solution is not going to be about interest rates, right? The solution is actually going to be engaging in some kind of price regulation. As we saw in the 1970s, for example, you had wage and price controls. You had a very different set of tools that were actually used. We saw price controls around energy, for example, in Europe. Actually, in England at one point, it looked like their energy prices might triple, and the government, quite reasonably, said, “We can’t do that to households. We are going to have to step in and do something about that and regulate that problem.” But that’s clearly not the Bank of Canada’s role. If you have a hammer, everything looks like a nail, and if you have interest rates, then you are really focusing on the monetary nature and the demand-driven nature of inflation.
Senator Yussuff: But that gives Canadians a lack of confidence, because, on one hand, they accept that inflation is a problem, but on the other hand, don’t blame me for 100% of the problem when half or more of the problem is on the other side of the equation. Do you think there is class bias in the context of how central bankers generally don’t want to point the finger where they should point the finger?
Ms. Best: One of the things I tell my students is that if someone tells you they know the cause of inflation, absolutely, then be very careful, particularly if they are a politician, because there is so much politics to how — is it greedflation? Then, ultimately, it’s a business-driven. If it’s wages, then it’s the working class. There is a class dynamic to how you understand inflation, absolutely.
That is, again, where a dual mandate comes in. If a central bank’s mandate is entirely price stability, then that is what it is going to talk about, and that does have distributive consequences. If you have a mandate that is partly about growth, then maybe you will also be looking at the bigger picture and figuring out what is driving inflation.
The Chair: Can we just go through a couple things here? We are trying to do an interim study, and then we hope to look at a larger picture and try to put some of this advice on the table as the bank itself considers these issues. One of the other things that you mentioned was the collective action, not just internally by expanding the voices inside or even the processes and how those voices might be represented. What else do you see? All of the informal stuff that goes on, whether it is poll taking, whether it is the meetings they have, the listening tours — they tell us all of this, but nobody else is in the room to hear that or to see how it is weighted. How would you see this collective action actually working?
Ms. Best: This is a very interesting question.
One of the commonalities between the three reviews that I looked at — the European Central Bank, the Federal Reserve and the Bank of Canada — was they all did something like a listening tour. It was the Federal Reserve that started it, but apparently the Federal Reserve thought that this is what we did in Canada, but they said, “Well, no, actually we just” — initially they were just talking to experts, so the idea of going and talking to regular people was new, but then the Bank of Canada borrowed it back from the Federal Reserve. I find it fascinating how they talk to each other, but they also sometimes, I guess, misinterpret each other.
I think that’s a really positive move. We have seen, as I said, a context of declining public trust in institutions, which is very worrying. For a democracy, people need to have trust in their public institutions. In that context, having central banks realize that they do need to pay some attention and figure out not just what the experts think or what the economists think or what the financial markets think, but what the population thinks, that’s a positive move, and continuing down that direction — I mean, it is not like we’re going to have a public vote on every interest rate, but taking the pulse and figuring out what’s going on is very valuable. Now, what does that translates into? I did ask members of the Bank of Canada what those consultations produced. It wasn’t clear, materially, what that produced, but I do think that it was part of the conversation, certainly.
In the Federal Reserve, in contrast, Powell was hugely influenced by what he was hearing on the ground, and what he was hearing on the ground was that Federal Reserve interest rate policies, particularly if they shut down a hot economy very quickly, had very significant distributional implications. In particular, racialized communities are affected much, much more intensely. They benefit from running the economy a bit hot and they suffer when that gets shut off. He really took that to heart, and that played into some of the shifts that they made in their change. Again, there is a possibility there for those conversations filtering through.
The Chair: We heard testimony from Mr. Galbraith, whose work I am sure you know, and he made the point, partly in jest but not really, that because of the transparency in the fed system, in the U.S. system, and because they are accountable and speak publicly and are answerable publicly — you talked a little bit about political accountability — in fact, you then get a different kind of governor or chair because they do have that accountability to the public in that way, just not behind the scenes. Do you share the view that if there was that level of accountability and what they heard needed to be reflected or at least an explanation of what they did with what they heard needed to be explained, that that would give us another level of accountability?
Ms. Best: That’s a really interesting question.
Even today, obviously, the Governor of the Bank of Canada has to be very good at communication, partly because they are operating on — they are trying to change expectations and build credibility, and that means that what they say can move markets, in fact, particularly in the U.S., but I think in Canada as well. We have seen that. So they are always, I think, quite sophisticated in that respect.
The question of transparency is an interesting one. There is a study out there by Ellen Meade, and maybe someone else, where they looked at what happened, because in the U.S., they were recording all their meetings but didn’t actually realize that. For a researcher like me, this has been a gold mine. You can go back and actually see the conversations when Volcker was talking to them about what to do, and when they gave up on monetarism, you can actually see that meeting. But when they found out, it suggests the nature of the conversations did change once everything was being recorded and once everything was being published. There is a trade-off there, potentially, that you are maybe perhaps a bit less frank with that level of verbatim. Knowing your vote is one thing; knowing exactly what you said is something different. It’s worth having a conversation about forms of transparency and what the implications are for the nature of deliberations.
The Chair: Something short of recording the meetings and putting them out, but some explanation of the impact of what they heard.
Senator Yussuff: Just to continue on this point, the bank does a lot of good things in talking to Canadians’ institutions across the country, for a sounding board, for getting advice or for getting a different perspective on what may be happening that they may not be aware of. But it shouldn’t be on an ad hoc basis. After all, this is an important institution to Canadians and the economy overall. Shouldn’t it be a little clearer in its mandate that they have to do these things? It gives them legitimacy, but, equally, it gets Canadians engaged in the important work they do. We’re trying to figure out the mandate in a way that will bring more certainty to the bank. As for roles of politicians, at the same time, don’t blame the bank and point fingers at the bank when they believe it’s an easy target because the bank can’t defend itself. You expect institutions to come to the bank’s defence.
Nobody else has the ability to do what the bank does in this country, and it’s such a mysterious institution for the most part for most ordinary people. Shouldn’t we have a mandate that says, “Listen, it would be good for you to talk to people. You might learn something.” What they learned in the United States is, “Excuse me, but you can’t simply shut down a hot economy; you’re going to affect a certain population in this country that is marginalized to begin with. Think about that.” The bank obviously thought about it and figured out how best to address it.
Do you think this should be something that should be in the mandate of the Bank of Canada, if there were to be a new mandate? These are things that should be built into the mechanism of the bank and its responsibility.
Ms. Best: Without being absolutely precise about what that looked like, you could certainly talk about getting a sense of public sentiment in one form or another. I think the Bank of Canada did focus groups and some local community consultations.
The Federal Reserve has continued doing this consistently now. They have a local structure, so they use their regional boards to continue those conversations. I think that’s been a positive step for them.
The Chair: That’s most helpful, as we consider what advice we might give here.
Senator Loffreda: I’m just looking at emerging trends and risks. How do you see the rise of central bank digital currencies impacting the effectiveness and implementation of Canada’s monetary policy, the most significant risks? If I look, there are some central banks — for example, in Europe, the ECB has progressed to the preparation phase for a digital euro. China continues to expand trials of a digital yuan. The United States has shown caution but is advocating for private sector-led payment innovations over a government issued digital dollar. What’s your take on that? It’s an important issue that we’ll eventually have to tackle.
Ms. Best: I’m not an expert. I haven’t dug deeply into this question, but I think it’s going to be something that central banks are going to be dealing with. They got interested in it, I think initially, when we had the idea of the Libra, and I thought, “Oh, my goodness, if Facebook creates a currency, then this is something quite serious,” the fear being that their capacity to control interest rates and money supply is potentially threatened if you have a very major non-government-based currency that is functional. That said, I think it’s going to be studied. I’m not an expert particularly on those debates, but this is something we’re going to be hearing quite a lot about in the years to come.
Senator Loffreda: Are you confident the Bank of Canada could tackle those issues in the current framework?
Ms. Best: I think this is something that is happening globally, as you say. The key there is to look at the global best practice and the conversations that are happening. We don’t have to be the first. I think it would be quite useful if we looked at what other central banks are doing and then figure out our best strategy moving forward.
The Chair: Thank you very much. Finding somebody so enthusiastic about this issue is wonderful for us, Dr. Jacqueline Best, Full Professor, School of Political Studies, University of Ottawa, and an awful lot of academic work on this field. Thank you.
Continuing our session with our second panel, we have the pleasure of welcoming the following witnesses in person: from Statistics Canada, Jennifer Withington, Assistant Chief Statistician, Economic Statistics; Brenda Bugge, Director, National Economic Accounts Division; Matthew Hoffarth, Assistant Director, National Economic Accounts Division; and Matthew MacDonald, Director, Consumer Prices Division.
The floor is yours, Ms. Withington.
Jennifer Withington, Assistant Chief Statistician, Economic Statistics, Statistics Canada: Thank you for inviting us here to speak with you.
[Translation]
My name is Jennifer Withington and I’m Acting Assistant Chief Statistician, Economic Statistics, Statistics Canada. With me are my colleagues Matthew MacDonald, Director, Consumer Prices Division, and Brenda Bugge and Matthew Hoffarth, National Economic Accounts Division.
Statistics Canada plays an essential role in supporting Canada’s monetary policy framework by providing reliable, high-quality current economic data.
We measure inflation, economic growth and labour market conditions. These are fundamental data that enable Canadians, policymakers and institutions like the Bank of Canada to make informed decisions that affect the national economy.
[English]
A key contribution is the consumer price index, or CPI, one of the many statistical indicators that enhance our understanding of the economy. In recent years, inflation measurement has been highly topical, and we have spent considerable effort to ensure that all users, from policy-makers to the general public, understand this product and its applications. We engage through webinars, podcasts, “ask me anything” sessions, social media and other outreach tools, making our data clear and available to everyone. This approach helps Canadians and policy-makers alike grasp the relevance and accuracy of our data.
Equally important is the labour market data which captures the evolving dynamics of employment levels, wage trends and workforce participation rates. This data sheds light on sectoral changes, demographic impacts and regional differences. Currently, Canada’s labour market remains resilient, though we are observing shifts across industries as employers and workers adapt to economic pressures.
By providing precise, up-to-date information on inflation, labour markets, economic output and debt, Statistics Canada supports policy-makers, businesses and Canadians in navigating a complex economic environment. We are committed to ensuring that our data remains transparent, reliable and relevant for the benefit of all Canadians. I look forward to your questions.
The Chair: Before we begin here, can you give us a couple of technical descriptions. The bank talks about its preferred measures of core inflation, which exclude some of the more volatile components. Do they have a separate category that they use? Do you hive that off for them, or do they select out of it?
Ms. Withington: We do have a number of definitions. I’ll start, and Matthew can add to them. We have a few measures called the CPI-trim, which trims out the outliers in the price changes to get something more concise; the CPI-median, which takes the inflation rate around the median, the 50th percentile; and the CPI-common that tracks common price changes across categories in the CPI. Those are a few of the major ones. We also have some excluding volatile components, as well as we have CPI excluding mortgage interest costs.
The Chair: So you pre-do that, and they come and take the —
Ms. Withington: Yes, exactly.
Senator Massicotte: Further to that question, when the Bank of Canada posts the quarterly report, which one of your definitions have they used?
Ms. Withington: So those are — I guess it depends on — I think they use different ones in doing their monetary policy.
Senator Massicotte: [Technical difficulties]
The Chair: No. I was just asking if the bank made its own assessment of that or whether this was provided.
Ms. Withington: I think those definitions were defined by the Bank of Canada. It’s sort of like going to a restaurant where — you know, we have a menu. We can tell them what some of the ingredients are and how we bake it. We’re responsible for doing those things, but essentially —
The Chair: Great. Thank you for that.
Senator Loffreda: Thank you to our panellists from Statistics Canada for being here.
My question is on data gaps and challenges. We always say, “He who owns the data owns the future.” We take decisions based on accurate data and facts. Are there any significant data gaps that Statistics Canada has identified in the context of monetary policy, and what steps are being taken to address them? How does Statistics Canada plan to leverage big data and advanced analytics to enhance the granular and timeliness of economic data relevant to monetary policy?
Ms. Withington: In terms of data gaps for the Bank of Canada, we work extensively with the Bank of Canada to ensure that we meet their data needs. For instance, during the times of high price inflation, when they were looking at their modelling, we provided them with much more information on producer prices and other areas where they needed more information. As I mentioned in the introductory remarks, the big items that they’re looking at are consumer prices and economic output, as well as the labour market. We do try to gather more information as the economy evolves. For instance, we do have more information on AI and other areas that might be of interest, but it’s through collaboration with the Bank of Canada that we find out their data gaps. As an important user, we do try to address these data gaps as possible.
Senator Loffreda: Are they frequent?
Ms. Withington: Our meetings with the Bank of Canada?
Senator Loffreda: Well, both. And the data gaps.
Ms. Withington: Our meetings with the Bank of Canada are frequent. At the working level there, we have post-mortems. We meet with them regularly, and as well we answer some of the contextual questions around our data, maybe revisions and certain economic things that might have happened.
Further to that question, are the economic data gaps frequent? They’re always looking for more granularity. We’re always striving to provide more granularity. I don’t know if there’s anything in particular that —
The Chair: Do you want to add something, Ms. Bugge?
Brenda Bugge, Director, National Economic Accounts Division, Statistics Canada: That’s one of the challenges when you measure the economy, especially when you measure the economy after a pandemic and through a pandemic. We had some new data gaps that came about. We had supply chain gaps. We had some issues with receiving some responses from our surveys. We were able to manage those with working through it either with our partners, such as the Bank of Canada, or our other users. We’re very forthcoming with all the methodology we use when we’re estimating any of the components from our output. Working closely with the Bank of Canada, that has enabled us to find other ways to possibly fill any of those data gaps. For example, if we had a building construction survey that was a little bit late during the pandemic, we would look at labour indicators to help us fill that data gap, and part of that comes from the collaboration, as Jennifer mentioned, with frequent meetings with the Bank of Canada or with any of our users when we go through the methodology.
The Chair: You’re all anxious to go in, so Mr. MacDonald, go ahead.
Matthew MacDonald, Director, Consumer Prices Division, Statistics Canada: Maybe for the context of the CPI, we don’t feel like we have major data gaps at this point. We’re covering the majority of significant household expenditures.
In terms of leveraging big data, we’ve made significant strides recently over the last few years on the CPI in terms of incorporating retail scanner data and using machine learning to classify that information and code it appropriately and exploit it as much as we can for the purposes of measuring inflation, and we also use a lot of web-scraping techniques and automated interfaces for such areas as accommodations and air transportation and things like that. So we’re increasingly becoming more involved in big data.
The Chair: Mr. Hoffarth, you might as well jump right in.
Matthew Hoffarth, Assistant Director, National Economic Accounts Division, Statistics Canada: I will answer this question with a bit of bragging about one of the gaps we filled over the pandemic. We have our distributions of household economic accounts. As we know, interest rate changes don’t affect all households equally. In our macroeconomic accounts, we would have household saving and household consumption, these big aggregates, and it hit a lot of what is happening under the surface. We were one of the first countries to produce not only annual distributions by income quintile, by age group, by generation, but we were the first country to do it on a quarterly basis. This helped, during the pandemic, reveal some of the income inequality and the wealth inequality that would arise because of how incomes are distributed not to everyone equally.
The Chair: Thank you for that.
[Translation]
Senator Gignac: Welcome to the witnesses. As you might imagine, I’ve been a user of Statistics Canada data for several decades, and I continue to be one now as a senator. Thank you for what you do.
I have two questions. First, can you tell us about your consultations? Do you consult economists on a regular basis? Do you meet with your OECD counterparts? Are there annual meetings and exchanges of methodologies? The situation is evolving and the economy is changing. Obviously, there are ways of measuring that evolution. Can you talk a little about governance? I’ll have a second, more pointed question about the Bank of Canada.
Ms. Withington: Thank you for the question. Indeed, we are present at the various meetings for discussions with the other economists.
[English]
I am currently the chair of the working party of national accounts from the OECD and on the advisory expert group of national accounts as well as the group of experts of national accounts. We also have our own international forum, such as the Ottawa group, where we bring in experts from across the world to discuss prices. Brenda and Matt are on a number of technical expert working groups as well, and Brenda is on the working party of national accounts. A big part of our job is to discuss the different conceptual issues surrounding prices, national accounts and with our counterparts in labour as well.
Senator Gignac: I don’t know if it’s a criticism, but I like the fact that, for example, pausing inflation as a measure by the Bank of Canada is quite a different approach from that of the U.S. We’re just trying to see who was the best. As we speak, at least for the last 12 months, most of the inflation in Canada came from housing, but the methodology is different in the U.S. Some people mentioned that maybe we overestimated inflation in Canada. Could you elaborate a little? Is there any possibility that you will reconcile with the U.S., or is it for the U.S. to reconcile with you?
Ms. Withington: This is a great question.
We do measure housing differently than the United States. We use an opportunity cost for housing. Through our groups, we have looked at the different options and, at this time, because of the nature of the Canadian economy, we have felt that our measure is good. We follow international standards in both macroeconomic accounts and for prices as well. We do also offer a CPI excluding mortgage interest costs as well.
Mr. MacDonald: Measuring shelter is fairly complex. It’s probably one of the most complicated aspects of a consumer price index, and there is not an internationally agreed upon standard. There are probably about four different methods that are used.
As Jennifer described, we use a variant of what is called the user cost approach, which is essentially the cost of owning and operating a home. We feel that’s the best measure for Canada because, in Canada, we have a kind of one-size-fits-all CPI. That tends to suit multiple purposes. These multiple purposes fall into two camps, either monetary policy determination or income escalation.
The U.S. is a good example. They use what is called a rental equivalence, so they’ll associate the cost of housing based on what the market rent would be for a particular house, but they don’t target that for monetary policy purposes. They use it for income escalation. For their monetary policy purposes, they use a deflator, a price index from their system of national accounts.
Senator Gignac: Even though I’m an economist, I’m confused by the Bank of Canada. For 15 years, they used what they called CPIX, and then suddenly, six or seven years ago, they dropped that and adopted three measures, and two years after that, they dropped one of the three, the common one, because it was not working. Interestingly enough, the former CPIX measure reacted faster to inflationary acceleration and faster to interest rate of decline. It’s interesting. Some folks mentioned that maybe if we stick with the previous measure of underlying inflation, they will have a better measure than those they adopted six years ago. Do you have any opinion on whether it’s better for the Bank of Canada to go back to the previous measure than those they follow now?
Mr. MacDonald: I don’t want to comment on the use of the Bank of Canada, but let me explain what we have in Canada. We have a headline measure of CPI, but we produce a variety of variants of that: CPI minus food, CPI minus energy, minus gasoline, and even minus mortgage interest costs. We also produce the three preferred measures of core inflation that the bank designs, but we do the calculations and we publish them. These are all a collection of indicators that are in the policy tool box for policy-makers and users in general to evaluate inflation, but at the end of the day, the uses of the CPI are all based on the “all items.” Some countries have progressed in a different direction where they have different headline measures of CPIs for different purposes.
The Chair: Thank you.
Senator Ringuette: I guess my question is a good follow-up. You talked about having a menu, but any good restaurant that wants to have a long existence will review its menu and understand that their clientele have an evolution in taste. There is an evolution in the goods and services that a household will purchase. How do you integrate that evolution in your CPI?
Mr. MacDonald: What you’re referring to is what we call a basket update, where we update consumer expenditure patterns and goods and services. Traditionally, that was done on a five-year cycle, and it has since increased to two years. Now, since the pandemic, we’re on an annual basket update cycle. We’re one of the leaders internationally in doing that. We’re very timely in terms of picking up the new expenditure patterns and integrating new goods and services into the index as quickly as possible.
Senator Ringuette: Is that in all income levels? That is also a great variant.
Mr. MacDonald: That’s correct. The CPI is an average of expenditures across all Canadians. We use a data source based on a survey of household spending or expenditures from the system of national accounts. Particular cohorts of the population might have expenditure patterns that differ slightly from the Canadian average but, by and large, we’re capturing the majority of spending from Canadians.
Senator Ringuette: But in doing that and maintaining your line to evaluate inflation and the cost and so forth, are you still able to upgrade the goods the households use and keep that the standard, the bottom line, for comparison purposes? You’re able to do that?
Mr. MacDonald: That’s correct, yes. Not only will we update the weights, but we’ll update the products, goods and services that come in. As technology evolved, we introduced tablets and smartphones, and others that have become obsolete have dropped out, or new services that emerge, we pick up. If spending is significant enough, then we will incorporate them into the basket.
Ms. Withington: We do adjustments for quality, as Matt was alluding to. As computers get more powerful, we adjust for the price, so we compare apples to apples, so that it’s what we call pure price change.
Senator Ringuette: Are you the only national institution that does that on a yearly basis?
Mr. MacDonald: I think there are a couple others that are quickly behind us, but we are an international leader in this area, yes.
Senator Ringuette: Good. Thank you.
Senator Varone: Along the same lines, I asked this question previously, but I’ll get right into the details of it: shrinkflation. I came from an era when I used to buy more, pay less, get volume discounts, and now I buy less, pay the same, and my cereal box went from 560 grams to 495 grams. I used to be able to fit only one muffin from Tim Hortons into the bag they give you, and now you get a muffin and a couple of doughnuts because they all shrank. Toilet paper went from three-ply to two-ply, and a box of pasta from 450 grams to 310 grams. How do you account for that? How do you capture that and create your statistics around it?
Mr. MacDonald: Particularly in food, we account for shrinkflation. What has been labelled shrinkflation recently is what we have called quantity adjustment, which we have done for decades. It is essential for measuring pure price change. You want to ensure you are measuring the same quantity and quality over time. We have a fixed sample of food products that we measure, and in addition to the prices, we also collect the descriptions and size and weight information, depending on the food product. When we’re comparing that from one month to the next, we will look at whether there are any differences in those details, and we will adjust accordingly. For example, if quantity shrunk but the price stayed the same, we will measure that as a price increase in the CPI.
Senator Varone: One follow-up: greedflation. Just corporate greed. Is there a mechanism to capture it, or does it come out in the overall statistic? It’s the latter?
Mr. MacDonald: It comes out in the overall statistic. We are measuring final consumption prices. All the cumulative impacts or factors that go into end consumer prices are embedded in the price. It is hard to distinguish that for a particular increase in price of, for example, 10%, a certain portion is attributable to supply chains or a certain proportion is attributable to so-called greedflation, et cetera.
The Chair: Or a freeze in California.
Senator Yussuff: First of all, let me start by thanking you for the great work you do. In my previous life, I read your data every month because I had to comment on employment insurance, youth unemployment, wage growth and the list goes on. The data you produced was invaluable because it gave me a road map as to what the conversation should be.
Looking at inflation and the retrospective in regard to what the bank had to do to apply its monetary policy to deal with inflation, have you been able to learn everything, whether it was a demand-side problem or supply-side problem? This is a fundamental question. What caused the inflation? Everybody said that we had a huge challenge after the pandemic. In the U.S., the data is suggesting different ways about how monetary policy didn’t contribute much to bringing down inflation as the U.S. releases oil supply and inflation dropped. What can we learn from this, and are you doing any work to inform the public? If we’re going to have faith in our institution, as the Bank of Canada in terms of this role, what can we learn from its action?
Following up on a point my colleague just made, we know statistically that companies made a huge amount of money. The data is there about the profit margins. Yet, in the context of dealing with inflation, it has always been directed at increasing interest rates to keep inflation under control, but on the other side, the profit margins for these companies haven’t diminished as a result of supply chain problems. How are we able to explain this to Canadians to make any sense? There is a degree of frustration among the public that while inflation is now down, their grocery bag is smaller as a result, so who are they to blame for this problem?
Ms. Withington: First of all, there is a perception because, while inflation has slowed, the prices still remain high. They were still continuing to increase, just at a slower rate.
For your question on the demand side and supply side, when we do our output, we try to provide economic context for different movements. For example, we have seen supply chain issues that have impacted, for instance, the automotive industry. At the same time, you see some demand side increases as well. For instance, with travel tours, when people were able to travel again, we did see some prices increase through that. It is a combination of different variables.
In terms of profitability, the national economic accounts is a structure, so we look at all the different elements. We look at the supply, the demand, as well as corporate profits, all in the same context. It is sometimes difficult to do a one-to-one analysis, saying that this caused that, but we do try to provide all the contextual information.
Ms. Bugge: That’s one of the benefits of compiling the GDP in the same area with the CPI. When we’re working on the GDP, we’re bringing in so many data sources. I always liken us to integrators of data. One person once said that we were the worst Sudoku puzzle ever because we have to make all the pieces fit. If we have our trade numbers saying that there are a certain number of cars coming across the border, we then make sure that we have that demand, so that purchase of those cars or placing that in inventories. That, I think, is a fundamental or the base aspect of having quality statistics, because we are compiling them not by ourselves. Everything is brought together to make sure it makes sense. We work closely with the CPI, but also the three measures of GDP to try to see where things might be out of whack.
As Jennifer mentioned, it was hard to identify if it was a demand side or supply side, but we saw a lot of these ripples coming through in a lot of our source data, and that meant that we had to spend more time trying to validate them either through using a different data source or consulting with some of our colleagues. In 2022, we often contacted the U.S. Bureau of Economic Analysis and the U.K. Office for National Statistics with regard to their measurement of the economy. Did they see this in their economy? How did they keep track of it or adjust their system so that we maintained not even internally but externally with other countries that international framework for the measurement of the economy.
Mr. Hoffarth: We don’t necessarily measure the impacts of monetary policy specifically. We measure the macroeconomy using our standard framework, and we hope that, by assembling the Sudoku puzzle accurately, that this is the information that the Bank of Canada or others can use to look at that question that you are posing.
Senator Yussuff: When you look at inflation, it would be wrong to simply assume that everybody is impacted the same way. I think you alluded to this earlier. Half the population in the country are women. In terms of gender, have you seen data that indicates how differently women are faring in the economy versus men overall?
Mr. MacDonald: I don’t think so specifically. We don’t necessarily look at it by gender. We’re seeing that on the income bracket, it is more challenging because people in the lower income bracket spend a majority of their disposable income on essentials, so food, shelter and transportation, and that’s where a majority of the inflation has been.
Senator Massicotte: When you measure inflation, would you agree with me that, while everybody may have a different way to get there, what is important is the change — the increase. You say that your system is different than the American side. Irrespective of what is different, does it give you the same result? Are you talking about increase only or decrease? Can somebody help me there?
Mr. MacDonald: You are correct that the CPI is a measure of price change, not price levels. The biggest challenge that we face currently is that, while inflation is decelerating, Canadians and consumers might not be feeling that when they are making their purchases because prices are still elevated.
Senator Massicotte: The politicians basically say, “We’re down 2%,” but that doesn’t include all the previous increases. It is a manipulation of information, frankly, because it gives the impression that we’re down 2%, but you lost 15% in the last year and a half. It is frustrating. It would help if everybody used the right language.
Mr. MacDonald: It is frustrating for Canadians. Inflation is the rate of price change. When we say that price inflation is slowing, it does not mean prices are declining. It just means that they are continuing to rise at a smaller and smaller pace, and that’s what the CPI is showing, and that’s what we believe is happening.
Senator Massicotte: Thank you very much. You have a phenomenal reputation internationally, so congratulations to you and your team. I can see somebody taking that box of cereals and so on and calculating the differences. I say, boy, you must have a lot of employees. How many employees work at Statistics Canada? Because I can see you on the concrete floor measuring how many ounces there are.
Ms. Withington: Overall, at Statistics Canada, I believe we have 6,000 or 7,000 employees. That’s in all topics, though.
Senator Massicotte: That’s real inflation, right? That’s a lot of cereal.
Ms. Withington: To your previous point, it is the cumulation of all inflation changes, and that’s what the consumers feel, and we understand that. We do try to add context in our analysis by not just saying that this is what the change was month over month, and this is what the change was over a year. We try to look at larger periods of time. We also provide context. Prior to the pandemic, it has gone up this much, because that is what they are living. They are not necessarily living month-to-month or year-to-year.
For prices generally, I think there are about 125 people who work on the consumer price index and some interviewers in the fields.
Senator Massicotte: Thank you.
The Chair: Can I just come back to where I began on these — you described them — the CPI-trim, CPI-median and the CPIX. You talked about how you sometimes do breakdowns, which is this minus oil, this minus transportation, et cetera. I don’t know if there are issues here or whether you are allowed to say this, but why does the bank exclude the volatile components that impact people most directly, such as transportation costs or home heating oil? That seems it would be core.
Ms. Withington: I don’t want to speak on behalf of the bank but, in theory, I think they are trying to look at underlying price changes. Because something is volatile, it could change from month to month. They want to look at if it is something that will have longer-term effects.
Mr. MacDonald: Having a variety of core measures is more beneficial than historically when there was only one. The historic CPI minus X always removed the same items, whereas the CPI-trim, for example, now lets the distribution of price change decide which ones are eliminated. It is not always the same ones that are taken out to measure the core, and it allows that volatility to be removed irrespective of what component it is.
The Chair: But at some point, they would be looking at these issues. They would be looking at the price of home heating oil or driving to work in your car.
Mr. MacDonald: I mean, we can’t speak for the bank and what they look at, but based on the questions that we get from them, I believe that they look at a whole host of indicators, yes.
Senator Loffreda: We have covered a lot of how we measure the traditional economy and the impact on inflation, but with the rise of digital goods and services, how has Statistics Canada adapted its methodology to account for those evolving consumption patterns and inflation measurements? How does Statistics Canada ensure its employment metrics capture the realities of the gig economy, for example, where it is more and more a factor? Part-time work and underemployment may have major implications for monetary policy decisions?
Ms. Withington: As you can see, we are very excited about data. The evolving economy and digital economy are very important to Statistics Canada. I think we were talking earlier about the international framework. We have put more emphasis into measuring the digital economy.
One way is that we started doing monthly trade and services because a lot of the digital economy is, in fact, traded. We have enhanced our measurement of digital trade. We have also done specific studies on the gig economy through labour, making sure that we’re measuring it properly. In macroeconomic accounts, in labour productivity and measuring labour, we make sure that we count the number of jobs, not just the number of people. If you have somebody working three jobs, that would be accounted for. We have recently released the digital supply use tables, which breaks out the digital component of the economy, because it is so important to be able to see it separately and the impact of the digital economy.
Ms. Bugge: As Jennifer mentioned, we have the digital supply and use tables. We’re world leaders with regard to the digital SUT. If we bring it back to one of your earlier questions about a data gap, we could look at the digital economy years ago as one of those data gaps. At the time, when it was identified that there is this evolving world out there — I think it was back in 2018 — we had a digital economy satellite account. At that time, it was Matt who led that work, and it was actually going out to try to identify a data source for all of these components. For some of them, they are very difficult to measure, such as peer-to-peer rentals. We consider that as part of the digital economy. That is not the traditional accommodation measure. We had to figure out an additional way that we could fill that data gap. Some of that came from international colleagues when we asked them how they would do it. Other times it was more domestic partners. Is there a data source that we can obtain that we can use to measure some of those new components?
If we look at something like our trade that we’re bringing in that we order online — from any country in the world — we have partnered closely with the merchandise trade folks that get all of the data for goods on a customs transactions basis from CBSA. We partner with them to look at the imports so that we make sure that we’re capturing that supply with regard to our household spending. If someone is contracting a company that is not based in Canada that is bringing in furniture, we look at that company in the trade data to see what kind of furniture is coming in to make sure that our household spending is reflecting those purchases.
Senator Loffreda: Thank you.
Senator Yussuff: I have two very quick questions. Statistics Canada and also the census in Canada are telling us that the country’s population is changing in a dramatic way. Data is going to be critical as to how we understand how that population is faring. It’s more diverse than it has ever been in the history of the country, but it is also aging at a much faster rate. In the context of things that you measure and trying to tell our elected people to pay attention to because these are the trends that are happening in the country, how frequently do you provide data to all institutions that want to understand how we are adapting to this reality? When you have almost a quarter of your population that are going to be retirees, that is significant. They don’t have income. It is going to have a major impact on the economy. How do we measure that, and how do we provide that on an aggregate level across the country? Some provinces may not be the same, but it will be a dramatic impact on the economy going forward.
Ms. Withington: Thank you for that question.
It is something that is at the top of our minds. Some of the things that we have done to address this question more readily is that we are now putting more front-and-centre not just GDP but GDP per capita, because that’s something people want to look at more. It is how each person is doing individually, not just for the full economy.
We also have the distributions of household economic accounts, which Matt Hoffarth was referring to earlier. That gives us a lot of data broke down by age cohorts. It is consumption, income, savings and wealth by different age groups, so we get to see different activities and different patterns in the different age groups. For example, we see that the younger generation — maybe I’m aging myself — are less leveraged. Because of housing prices, they haven’t been getting into the housing market. We see a number of different trends that are very different amongst income groups as well as age groups.
Mr. Hoffarth: I think that was a great summary. It’s nice, because we’ve been here for a bit and we haven’t put a number on it, so we have got to quote some statistics.
Like I said, it is a great product. It is a quarterly basis. It helps identify financially vulnerable households. It does it by region, by age group, by income quintile and wealth quintile. That’s a continual source of information that didn’t exist a few years ago in its current form and in how detailed it is.
Senator Gignac: I want to ask you a question, but feel free to provide a written answer. I don’t want to take you off guard, but Canadians do not have a lot of confidence in Statistics Canada. Here at the Senate, we are independent and non-partisan, so my question is non-partisan, but it could become a topic in the coming year.
Since you are here about inflation, what is the rule of thumb for each $10 on carbon tax? The carbon tax, each time it increases by $10, what is the impact on the CPI? If tomorrow they scrap the carbon tax for whatever reason, what would be the overall impact on the CPI? We have noticed in the U.S. that some people go with alternative facts and exaggerations, so we want to have a straight answer from Statistics Canada about what will happen tomorrow if we no longer have the carbon tax. What would the impact be on CPI or on the level of inflation, if you want? If you have the answer, perfect; otherwise, just send it to us by e-mail.
Mr. MacDonald: Maybe what we can say is that the CPI measures final consumption. That includes all excise and indirect taxes, be it HST, GST, environmental fees and carbon levies.
Being a final demand or final consumption index, we really only see the impact of the carbon tax on a few components: gasoline, natural gas and home fuel up until the point where it was exempt, which would not be a significant factor. However, what we aren’t able to articulate is the cumulative effect through the supply chain, and that is what is very complex with something like the carbon levy. There isn’t really a good understanding of how those costs are flowing through.
Senator Gignac: In Quebec, we have a cap-and-trade system. There is no carbon tax. It is cap and trade, so that will have a different impact on the measure with inflation. It goes to the supply chain, but they don’t have the impact gasoline, for example.
Mr. MacDonald: I don’t think we would apply it directly for the cap and trade, but I may have to follow up specifically on your jurisdiction.
Senator Gignac: Thanks.
Senator Varone: At the risk of using way too many acronyms, I’ll call it “gratuity inflation” as opposed to “tip-flation.” Are you able to track what is happening in terms of the rapid increase from 8%, 10% or 12% gratuity to what is now starting at 18% and finishing at 25% almost everywhere you go where you are using the tap-and-pay method? If you have that ability to capture it, is it going to wages? Is it going somewhere else in your statistics? Where does that all fit?
Mr. MacDonald: We measure tips in our household spending. When we ask Canadians what they’re spending on restaurants, they will include those tips, and the income received from those will flow through into the income account in our macroeconomic accounts.
We do not price tips. Historically, when tips were very stable — say 15% — if you take a price change, and then you add 15% to each month, and then you take a price change, then the result is the same. If tips are increasingly becoming higher, that could be a source of inflation, but we don’t have a reliable data source for tips. There is also a bit of a conceptual argument about tips, because they are not mandatory. Consumers have the ability to control their level of inflation by determining which tip they want to provide.
The Chair: Again, I’m going to put you in a bit of an awkward position, but we are looking at the mandate of the Bank of Canada. That is what our study is about here. The questions have come up about the single mandate versus the dual mandate, so not just inflation but employment. We have touched on a lot of things here today, new technology and all of those things. Is the picture that you offer and that they ask for enough to reflect an economy and a society that is in huge flux?
Ms. Withington: Unfortunately, I can’t give you a yes or no answer and say, “Yes, it is enough.” Certainly, as society changes, it is changing at a faster and faster pace. To your point, technological change is happening faster, and we have AI. There are a lot of different changes. As it becomes more and more complex, you probably have to look at things a little less unidimensionally, so we would have to continue to look at various angles. Is it enough? We’re always striving to provide more context, more granularity, more information, and that will be required. What we’ll need to look at tomorrow will probably have to be different than what we’re looking at today.
Certainly, to your point, Senator Wallin, during the pandemic, the things we have looked at and the complications that we have had have been unprecedented, so I would expect that that will continue.
The Chair: That’s helpful. I wasn’t expecting a yes or a no. That’s great.
Thank you very much. I want to echo the comments of my colleagues here that I think everybody is very respectful of and proud of the work that you do, and we are thankful for it. We are also grateful for your appearance here today.
That brings our meeting to a close today, with a thank you to our witnesses one final time.
(The committee adjourned.)