Bank of Canada Weighs Exclusion of Mortgage Costs From Core Inflation — 2nd Update

By Paul Vieira

OTTAWA--The Bank of Canada is exploring new ways to measure core inflation that could exclude mortgage-interest costs from the calculation, says a senior Bank of Canada official.

Deputy governor Rhys Mendes said its preferred measures of core inflation have generally been helpful although less reliable during the period following the Covid-19 pandemic. Mendes said the central bank uses a broad range of inflation measures to judge where prices are going, and it doesn't "want Canadians or financial markets to become overly focused on a single indicator."

Mendes's remarks before business students and faculty at London, Ontario's Western University offer signals on what Bank of Canada officials are focused on as the renewal of its inflation-targeting mandate is due next year. The Bank of Canada's task, through an agreement with the Department of Finance, is to set rate policy to achieve and maintain 2% inflation.

Total inflation is a measure of overall prices. Central-bank officials also lean on gauges of core inflation, which generally strip out volatile items like food and energy, to get a better sense of where underlying prices are headed. Core inflation should be less volatile than total inflation, while still tracking total inflation's movements over the long term, Mendes said.

At present, Canada's central bank has two preferred measures of core inflation, called trim and median. Mendes said officials are exploring new measures in part due to a rapidly changing global economic backdrop that is more prone to geopolitical and structural shocks.

Mendes said officials are looking at excluding mortgage-interest costs from core-inflation measures. Central banks raise rates to tame inflation, but in doing so bring about inflation tied to mortgage-interest costs.

This is problematic 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," Mendes said. Excluding mortgage-interest costs altogether, like the Bank of Canada does with indirect taxes, is "something we're considering carefully, particularly as we think about how monetary policy and imbalances in the housing market interact."

Canada's housing market is plagued by a shortage of homes, which has kept house prices elevated. However, a weak economy, fueled by trade-policy uncertainty, and limits on immigration are beginning to put downward pressures on houses.

Mendes said officials are exploring new core inflation measures that isolate the persistent part of inflation, and are also experimenting with artificial intelligence to see how it measures core prices. So far, the early results from AI are encouraging, he said.

"It's more important than ever that we have good measures to assess underlying inflation because there's more noise," Mendes said during a question-and-answer session with the audience.

The central bank judges underlying inflation -- which Mendes described as a "concept" -- at about 2.5%, or below the official core reading of 3% but above total inflation of 1.9%.

Often, the assessment of underlying inflation is generally aligned with core readings, Mendes said. That wasn't the case in July and September, and that prompted debate among senior officials about whether to hold the policy rate steady or cut. Last month, the central bank cut its benchmark rate by a quarter point to 2.5%.

Mendes said officials believe underlying inflation is below core readings because of softness in the rental market which should put downward pressure on shelter costs; and a deceleration in input costs.

Write to Paul Vieira at paul.vieira@wsj.com

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October 02, 2025 15:04 ET (19:04 GMT)