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B A N K
O F
C A N A D A
Chart 20
Core Inflation and Broad Money Growth
Year-over-year percentage change
11
6
9
4
M2++
(left scale)
7
2
Core CPI
(right scale)
5
0
3
-2
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Inflation projection
Core inflation is expected
to rise to 2 per cent in the
second half of 2001.
A number of forces are expected to contribute to an upward
movement in core inflation over the next year. First, longer-term
inflation expectations continue to be close to 2 per cent—more
than one-half per cent above the current level of core inflation.
Second, with output growth projected to remain vigorous, capacity pressures in product and labour markets are expected to
become more evident. Third, wage increases are moving up.
The Bank therefore expects core inflation to rise gradually to
2 per cent in the second half of the next year. If output growth
through 2001 slows to a rate more consistent with the growth of
potential output, as expected, core inflation should stabilize at
about 2 per cent. But there is some risk that the economy could
grow more rapidly and move into a more persistent excessdemand situation next year, leading to further upward pressure
on inflation.
Recent hikes in crude oil and natural gas prices are expected to
keep the rate of increase in the total CPI close to 3 per cent for the
rest of this year. If oil prices were to stabilize at levels just below
US$30 a barrel, the rate of increase in the total CPI would be
expected to move down to about 2 per cent by the end of 2001.
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