THE CONSUMER PRICE INDEX (CPI) provides a broad
measure of the cost of living in Canada. While
there are other ways to measure price changes,
the CPI is the most important indicator because
of its widespread use, for example, to calculate
changes in government payments such as the
Canada Pension Plan and Old Age Security.
Through the monthly CPI, Statistics Canada
tracks the retail price of a representative
shopping basket of about 600 goods and services
from an average household's expenditure: food,
housing, transportation, furniture, clothing,
and recreation.
The percentage of the total basket that any item
occupies is termed the "weight" and reflects
typical consumer spending patterns. Since people
tend to spend more on food than clothing,
changes in the price of food have a bigger
impact on the index than, for example, changes
in the price of clothing and footwear.
Calculating the CPI
Prices are measured against a base year. The
base year is currently 1992, and the basket for
that year is given the value of 100. In 2000,
the CPI had reached 113.5, which means that what
you could buy for $100 in 1992 cost $113.50 in
2000. The Bank of Canada Web site has an
interactive Inflation Calculator that uses monthly CPI
figures from 1914 to the present to show users
the impact of inflation on purchasing power.
The rate of increase of the CPI is typically
reported as the percentage increase in the index
over the past 12 months. To provide a reliable
picture of the short-term trend of inflation,
comparisons of month-to-month changes in the
index are adjusted to reflect predictable
seasonal price changes.
Updating the CPI
The CPI basket is updated from time to time by
Statistics Canada to reflect broad changes in
consumer spending habits, as well as to take
account of changes in products and services.
Because of the difficulties of measuring price
changes due to changes in quality of products as
well as other variables, the CPI may contain a
certain
measurement bias that prevents it from
giving a completely accurate picture of
inflation. Recent studies of this bias suggest
that the CPI may overstate inflation by about
half a percentage point.
The Bank of Canada monitors changes in the CPI
in deciding when to take action to adjust
monetary conditions to keep inflation within the
range of the
inflation-control target it has set. To
assess the trend of inflation, the Bank finds it
very helpful to use the "core CPI," which
excludes eight of the most volatile components
(fruit, vegetables, gasoline, fuel oil, natural
gas, mortgage interest, intercity
transportation, and tobacco products) as well as
the effect of changes in indirect taxes on the
remaining components.
