How Mortgage Interest Costs Muddy the Picture Around Future Inflation

March 4, 2025 – After big monetary policy swings, removing mortgage interest costs from the Consumer Price Index (CPI) can provide a clearer picture to the Bank of Canada of where inflation is going, according to a new C.D. Howe Institute report.

In “Blurred Vision: How Mortgage Interest Costs Impact Inflation,” Steve Ambler and Jeremy Kronick examine the role of mortgage interest costs, or MIC, in influencing the CPI – Statistics Canada’s measure of fixed goods and services price changes for Canadian consumers.

The MIC only has a weight of around 5 percent in the CPI but can have a big impact, especially after the Bank of Canada’s tightening or loosening cycles. Therefore, Ambler and Kronick argue that the Bank of Canada should look through these costs to get a clearer indication of where overall inflation is headed in these circumstances. But the authors stop short of calling for its removal from Statistics Canada’s calculation of CPI.

“When the Bank of Canada’s policy rate started rising in March 2022, so did MIC inflation. MIC inflation has now fallen off its peak but has remained persistently high since then and stood at 10.2 percent in January 2025 – despite headline inflation decreasing from its peak of 8.1 percent down to 1.9 percent,” says Ambler. “It is gradually coming down, but it takes time due to its persistence.”

Because a substantial fraction of all mortgages in Canada are variable-rate, when the Bank of Canada increases or decreases the overnight rate, the MIC changes immediately, explain Ambler and Kronick. For fixed-rate mortgages – which are the majority – there is a lagged effect as they gradually come up for renewal. All told, when the Bank of Canada hikes the overnight rate, the MIC increases pushing inflation higher; when the Bank lowers the overnight rate, the MIC decreases pulling inflation down. “This can make inflation seem worse or better than the underlying trend suggests,” says Kronick.

In their research, Ambler and Kronick find that using a measure of inflation that strips out mortgage interest costs can be a tool to help anticipate the future evolution of overall inflation in specific circumstances – in particular during and after major monetary policy tightening and easing cycles. This tool could be used as a way for policymakers to communicate the evolution of inflation, how it fits into a particular tightening cycle, and when the Bank of Canada could afford to start loosening the reins.

“This measure could be one among many that the Bank of Canada uses in its assessment of the path of future inflation,” conclude Ambler and Kronick.

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For more information contact: Steve Ambler, Professor of Economics, Université du Québec à Montréal, and Fellow-In-Residence, C.D. Howe Institute; Jeremy Kronick, Vice-President, Economic Analysis and Strategy, C.D. Howe Institute; Lauren Malyk, Manager, Communications, C.D. Howe Institute, 416-873-6168, lmalyk@cdhowe.org