Core Inflation Measures and Total Inflation Predictions

This report focuses on the effectiveness of various core inflation measures in predicting total inflation, specifically examining the period from 2018 to 2025. It evaluates the performance of the Consumer Price Index excluding food, energy, and the effect of indirect taxes (CPIXFET), CPI-trim, and CPI-median as indicators of future total inflation, which is aligned with the Bank of Canada's target. The analysis involves estimating augmented Phillips Curves for each core measure and utilizing bridge equations to connect core forecasts to total inflation. The report details dynamic simulations that forecast core and total inflation over historical data, assessing predictive performance through root mean squared errors (RMSE). The findings indicate that CPIXFET consistently outperforms other measures, particularly over the longer sample period, while also noting that CPI-trim captures peak inflation effectively. The report underscores the reliability of CPIXFET as a guide for monetary policy decisions during uncertain economic conditions.