Friday, July 17, 2009

What is the core rate of inflation?

The core rate of inflation measures price changes in that same basket of goods - but without the most volatile elements (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation and tobacco products). It's the rate the Bank of Canada takes most note of.Since 1991, the central bank and the federal government have set inflation targets. The Bank of Canada currently tries to keep the rate of inflation between one and three per cent and aims for a 2 per cent target midpoint. The central bank uses interest rates to try to keep the rate within its target.

When inflation is at the low end of that band, the bank has the freedom to cut interest rates. However, if the inflation rate starts heading toward the upper end of the target, the bank may raise interest rates. Higher interest rates tend to reduce demand for certain goods and services. For instance, you'll be less likely to buy a car or a house when rates are higher and it's more expensive to borrow to finance the purchase.

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