Underlying Price Pressures Up Sharply  – No Matter How Measured

Today’s CPI data showed that not only is headline inflation continuing to rise but that domestically-driven price pressures are increasing. There are a number of different ways to measure underlying inflation – trimmed mean, excluding volatile items such as food and energy, the median. We have calculated another version using principal components analysis (PCA) (based on Bank of Canada research).

• PCA is useful for a large number of variables, as it finds common patterns that explain most of the variance in the data. In this case, it extracts the common movement in prices and thus creates a measure that reflects underlying developments in inflation and not sector-specific shocks.
• The chart below shows PCA CPI against other inflation measures. It is less volatile, with a standard deviation below that of the trimmed mean. After running ahead of the trimmed mean from 2019 until mid-2021, it is now well below at 4.6% compared to 6.9% y/y. While this may be suggesting that underlying inflation is not as high as other indicators suggest, the PCA CPI is also indicating that pressures are rising sharply.