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Canada’s annual inflation rate hit 4.7 per cent in November, the highest increase since 1991. A prominent voice on Bay Street thinks the actual inflation rate is much higher.

After Wednesday’s inflation report, Derek Holt published a scathing critique of Statistics Canada, the agency that produces the numbers. Mr. Holt, the head of capital market economics at Bank of Nova Scotia, wrote that investors are getting “fake data on what’s really going on with Canadian inflation.”

The true rate? It’s likely around 6 per cent, Mr. Holt said – closing most of the gap with the U.S., where inflation jumped to a near 40-year high of 6.8 per cent.

His argument centres on a key omission in Canada’s report: used cars. Statscan doesn’t track prices for used vehicles, a major source of inflationary pressure over the COVID-19 pandemic.

Few industries have been as affected by supply issues as the auto sector. A global shortage of semi-conductor chips has led to steep production cuts for new vehicles. Subsequently, rental fleets have held onto their vehicles longer, limiting the flow to the used market. And many people want to buy used cars, rather than take public transit during a health crisis.

All of that has conspired to send prices skyward. In November, the price of used cars and trucks in the U.S. surged 31 per cent from a year earlier. The shortage is so bad that some lightly used vehicles are selling for more than when they were purchased new.

The Canadian auto market is similarly strapped for vehicles, but the impact on used-car prices isn’t reflected in the consumer price index, or CPI, the country’s main gauge of inflation. When asked by The Globe and Mail about the omission, Statscan said it lacks sufficiently detailed data.

“This is because the quality characteristics for used vehicles vary greatly, and adjusting for these quality differences requires detailed information on the characteristics and selling prices of used vehicles, which we don’t currently have,” the agency said in a statement.

Mr. Holt said the U.S. and Britain have tracked used-car prices for years, “so frankly that excuse has worn a little thin by now.”

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There are various measures of the domestic market. For instance, an index published by Canadian Black Book shows used-car values jumped 9.5 per cent in November alone and by 38 per cent over the previous year – both records. Using that data source, Mr. Holt estimates annual inflation would jump about 1.3 percentage points, taking the rate to 6 per cent from 4.7 per cent.

“The issue is hugely important at a time of heightened sensitivity toward inflationary pressures,” he said. “Many things hinge upon accurate inflation readings, yet in Canada, markets and main street businesses and consumers are not being well served by this ongoing omission.”

For example, some individuals have their wages and benefits tied to changes in CPI.

“Monetary policy decisions affecting the cost of borrowing are the other obvious example of something that needs accurate inflation gauges,” Mr. Holt added.

Statscan does account for used vehicles when constructing its weighting of goods and services in the CPI. However, it uses new-car prices as a proxy for the used market. In November, the price of such vehicles rose 6.1 per cent over the previous year. In the U.S., those prices jumped 11.1 per cent.

Statscan said it’s evaluating alternative data sources and methods for including used cars in CPI.

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