The inflation rate does not give the right information

“The rise in prices and the loss of purchasing power are subjects that interest and directly affect all Quebecers, who must be able to consult a well-calibrated speedometer. Being calculated over the entire year that has just ended, the current inflation rate looks to the past,” explains Nathalie Elgrably, Senior Economist at the MEI.

According to this expert and her colleague Valentin Petkantchin, economist and vice-president of research at the MEI, the inflation rate would be “retrospective” and would simply show what happened in the past year. The current official rate corresponds, in fact, to the variation of the CPI over the past 12 months.

The MEI believes that a more forward-looking indicator would be more useful. The experts thus propose using a compound and annualized rate calculated from the rate of change in the CPI for the last quarter.

“We called it the ‘prospective rate’ of price inflation. Rather than shining the spotlight on the erosion of purchasing power compared to a year ago, the forward-looking rate sheds light on the erosion that awaits us if the CPI continues on its current path,” says Valentin Petkantchin. .

Thanks to the forward rate, one could have seen that the first sign of an inflationary surge above the 2% target would have occurred in July 2020, almost a year before official statistics indicated a deviation from the target. .

“If we make an analogy with a car, the prospective rate is to price inflation what the speedometer is to the car. Like the meter, which immediately indicates the distance that will be traveled if the current speed is maintained over the next hour, the forward rate announces the decline in purchasing power to come if the CPI continues to rise at the same speed”, illustrates Nathalie Elgrably.

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