When Deputy Governor Rhys Mendes of the Bank of Canada addressed an audience at Ivey Business School, he began with a simple but powerful metaphor. “Imagine you’re listening to a company’s earnings call,” he told the crowd of students, faculty, and business leaders. “You need to be able to separate the noise—the CEO talking about ‘optimizing impact’ or ‘leveraging synergies’—from the signal—say, a sustained decline in revenues.”
The event hosted by Ivey’s Lawrence National Centre for Policy and Management and Scotiabank Digital Banking Lab focused on how the Central Bank, through its review of their monetary policy framework, is working to “separate the signal from the noise” in measuring inflation. A task which has become increasingly complex in today’s volatile economy.
A timely visit to Ivey
The Centre and the Lab convened the event as part of their shared mission to connect national debates with current and future business leaders. With global trade being “rewired” and new technologies reshaping economies, the session offered a chance to hear directly how the Bank of Canada is adapting its approach.
Mendes reminded the audience that the Bank’s task is straightforward in principle but complex in practice: keeping inflation close to 2 percent. “Our job at the Bank is to keep inflation close to that target,” he said. “We do this by adjusting our policy interest rate.” Because rate changes take time to work through the economy, “we cannot and should not try to react to every wiggle in the monthly inflation numbers.”
Instead, policymakers must identify the lasting pressures on prices, or what Mendes called the “underlying inflation” that reveals the true signal.
Underlying vs. core inflation
To clarify the terms, Mendes explained that “underlying inflation is a concept, not a statistical measure. It tries to capture the persistent, or lasting, part of inflation that is related to economic fundamentals.”
Core inflation, by contrast, is a set of measures that attempt to filter out short-term volatility, such as sudden spikes in food or energy prices. “Ideally, a measure of core inflation should be less volatile than total inflation, while still tracking total inflation’s movements over the long term,” he said.
The Bank has long relied on measures like CPI-trim and CPI-median. But Mendes was clear: “There’s no single, perfect measure of core inflation. Every measure, however well designed, will, at times, send misleading signals.”
Beyond the preferred measures
That point has become sharper in the wake of the pandemic and shifting global conditions. Mendes pointed to the Bank’s 2025 experience, where total CPI inflation stood at 1.9 percent in August, but the preferred measures of core inflation were closer to 3 percent. “On balance, the evidence pointed to underlying inflationary pressures above the 1.9 percent level of total inflation but below the 3 percent level suggested by the Bank’s preferred core measures. Most indicators pointed to underlying inflation in the vicinity of 2½ percent,” he said.
These distinctions matter. “Half a percentage point can mean the difference between a decision to hold interest rates steady or to cut them,” he said.
Tackling tricky components
Some of the biggest challenges arise from specific parts of the Consumer Price Index, notably mortgage interest costs. Mendes explained the paradox: “When we increase interest rates, we want inflation to come down. But when interest rates go up, inflation in mortgage interest costs also goes up automatically.”
This quirk, he said, “can be a source of noise.” The Bank is considering whether all core measures should pre-exclude mortgage interest costs, a question that is central to the renewal of its policy framework in 2026.
Looking to new tools
Mendes also outlined innovative approaches under review. One is multivariate core trend inflation, or MCT, which isolates the persistent part of inflation and then breaks it down into broad pressures across the economy versus sector-specific shifts. “Initial results look promising,” he said, while acknowledging that revisions over time can complicate the measure.
Another area of exploration is the use of artificial intelligence. “Early results are good, but we’re still assessing the robustness of this approach,” he said.
Communicating the signal
Equally important is how the Bank communicates with Canadians. For years, it has highlighted certain “preferred” measures of core inflation. But Mendes noted that “at times, this language may have led markets to place more emphasis on the preferred core measures than we do.”
To improve transparency, the Bank plans to launch an interactive inflation dashboard next year. “Our new inflation dashboard will include more measures and be easier to use,” he said.
A steady target in uncertain times
While many aspects of the Bank’s approach are under review, one cornerstone remains fixed. “One thing we are not reviewing this time around is the 2 percent target itself,” he said.
In closing, he reminded the audience why the theme of separating signal from noise matters not just for central bankers but for everyone. “With these shifts come the potential for more and larger shocks. That means greater volatility in prices and the possibility of higher inflationary pressures. In this environment, cutting through the noise is more important than ever,” he said.
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