remarks by lawrence schembri deputy governor, bank of canada canadian association for business economics august 25, 2020 delivered via webcast perceived inflation and reality : understanding the difference “ all our knowledge has its origins in our perceptions. ” — leonardo da vinci introduction good afternoon. it is a pleasure to once again have this opportunity to speak at cabe ’ s annual late - summer conference, although the circumstances have changed radically since i last spoke a few years ago. the covid - 19 pandemic has disrupted all our lives and imposed much hardship on many. when i was last with you, we were on the top floor of a kingston hotel overlooking lake ontario. i felt tested to hold your attention given the lovely view. today, i ’ m similarly challenged, but by a virtual platform, made necessary by the serious health threat posed by the virus. the topic i ’ ll be addressing is inflation. it is a subject that central bankers never tire of talking about, since low and stable inflation is the core objective of the bank of canada ’ s monetary policy mandate. i would like to offer a slightly different perspective to engage your interest — namely, the difference between how people perceive inflation versus the actual measured rate. this issue is important because individuals ’ perceptions of inflation today — and their expectations of it for the future — influence their spending and saving behaviour, and thus affect overall macroeconomic outcomes. moreover, inflation expectations have significant implications for the credibility of our 2 percent inflation target and for the effectiveness of monetary policy. i would like to explore with you the observation that consumers, on average, think inflation is higher than what is measured and reported by statistical agencies. i would like to thank patrick sabourin and rolande kpekou tossou for their help in preparing this speech. not for publication before august 25, 2020 1 : 30 pm eastern time - 2this gap has been regularly observed in canada as well as in other jurisdictions, such as the united states and the united kingdom. 1 recent public outreach conducted by the bank has provided further evidence of this gap. as part of the process leading up to the renewal of our inflation - control target agreement with the federal government in 2021, we have sought out and are listening to the views of the public and other key stakeholders. one of the messages we have heard is that many people feel that the official consumer price index ( cpi ) inflation rate does not reflect the higher inflation they believe they are facing. this gap between perception and measurement has been more

is a correlation between current perceptions and future expectations of inflation at both the one - and five - year horizons. for example, if consumers think prices have notably increased in the last 12 months, then there is a good chance they will expect inflation to stay high in the future. finally, the difference between expected inflation and current inflation ( as well as relative to our target ) increases as the horizon is extended from one year to five years. 6 chart 1 : households perceive inflation to be higher than official measures % 2014q4 2015q4 2016q4 2017q4 bank of canada inflation - control target current perceptions of inflation five - year - ahead inflation expectations sources : statistics canada and bank of canada 2018q4 2019q4 actual cpi one - year - ahead inflation expectations last observation : 2020q2 as an aside, it is noteworthy that a comparison of the csce with a similar survey published by the new york federal reserve bank finds the perception gap is smaller and less dispersed in canada than in the united states ( chart 2a and chart 2b ). this difference may reflect the impact of different communication strategies by the bank of canada and the us federal reserve. 7 5 it is important to note that this gap is observed, on average, across canadian households. the gap is larger for some groups — for example, younger households. 6 the higher expected inflation rate at the five - year horizon might reflect increased uncertainty about inflation outcomes, as suggested by relatively lower response rates. we also observe a greater degree of dispersion among respondents at this horizon. 7 bellemare et al. ( 2019 ) conjecture that the narrower gap in canada might be related to the bank ’ s success with and focused communications on the 2 percent inflation target, creating a focal point for perceptions and expectations at 2 percent. in bellemare, kpekou tossou and moran, “ the determinants of consumer's inflation expectations : evidence from the us and canada, ” ( unpublished manuscript, department of economics, universite laval, july 1st, 2020 ), latex. - 5chart 2a : inflation forecast errors are larger in the united states than in canada % - 1 2013q3 2014q3 2015q3 2016q3 2017q3 2018q3 canada one - year - ahead inflation expectations canada inflation realization, one year later united states one - year - ahead inflation expectations united states inflation realization, one year later sources : statistics canada, federal reserve bank of new york survey of consumer expectations, us bureau of