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Investing.com -- With inflation volatility growing amid persistent global shocks, Bank of Canada Deputy Governor Rhys Mendes said the central bank is reevaluating how it assesses and communicates underlying inflation as part of its 2026 monetary policy framework renewal. Speaking at the Ivey Business School in London, Mendes emphasized the need for policymakers to "separate the signal from the noise" in a shifting macroeconomic landscape.
The distinction between core and underlying inflation lies at the heart of the Bank’s current review agenda. “Underlying inflation is a concept, not a statistical measure,” Mendes said, stressing that the Bank’s forward-looking policy stance requires filtering out short-term volatility in the consumer price index. Measures such as CPI-trim and CPI-median have offered valuable insights, though they are not without limitations.
In August 2025, headline inflation came in at 1.9%, near the Bank’s 2% target, but core indicators told a different story, hovering around 3%. Mendes emphasized that this gap between measures has real policy consequences. “Underlying inflation was roughly half a percentage point lower than our preferred measures,” he said. “That difference might not seem like much, but in the realm of monetary policy, it is important.”
Recent inflation pressures have primarily stemmed from shelter services and non-energy goods, both still running above pre-pandemic averages despite some moderation. However, Mendes pointed to easing input costs and softening rental markets as possible signs that underlying inflation could drift lower over time. The Bank is closely monitoring these developments to assess their persistence and policy significance.
As part of its framework review, the central bank is also considering refinements to how it handles challenging CPI components, including mortgage interest costs. These are proving increasingly problematic given their automatic rise following rate hikes, which paradoxically pushes inflation estimates higher. Mendes cited cases where alternative core measures excluding these costs aligned more closely with the Bank’s inflation assessment.
Beyond refining existing measures, Mendes said the Bank is exploring new tools, including multivariate core trend (MCT) inflation and machine-learning models. While still in early stages, these techniques may support more precise readings of persistent inflation trends. “Initial results look promising,” Mendes noted, particularly for identifying broad-based pressures that are more responsive to monetary policy.
The Bank is also revisiting how it communicates inflation metrics to the public and markets, where preferred core measures may receive outsized attention. Mendes acknowledged that current language describing these indicators as “an operational guide” may contribute to this overemphasis. To improve transparency, the Bank plans to roll out an interactive inflation dashboard in 2026 to allow users to explore a broader array of indicators.
Despite pursuing these changes, Mendes reaffirmed the cornerstone of the Bank’s approach remains unchanged. “One thing we are not reviewing this time around is the 2% target itself,” he said. With heightened geopolitical risks and economic volatility, Mendes concluded, “cutting through the noise is more important than ever.”