Enhancing the CPI

At Statistics Canada, there are price indexes galore—housing, energy, intercity prices, machinery and equipment, commercial software—to name a few on the StatCan hit parade.

But the index that touches people most directly is the Consumer Price Index (CPI). Pension cheques, tax bra­ckets, rent controls, transfer payments and collective agreements are linked to the CPI. The Bank of Canada uses the CPI to help set monetary policy, which affects the cost of borrowing.

It can also help win arguments over whether the price of gas has gone up more quickly than the price of roast beef. Spoiler alert: It has.

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Makeover underway

The CPI has been chugging along for 90 years, with tweaks here and there along the way. But it is now undergoing a makeover. The CPI Enhancement Initiative, which runs from 2010 to 2015, will tune up the engine and prepare the CPI for ever more changes ahead. And, this rejuvenation is underway while the CPI keeps pumping out accurate figures every month for Canada, the provinces and selected cities.

Chief Statistician Wayne Smith notes that the CPI enhancement reflects both changing international methodology and the economic changes of the past 15 years. “The CPI is a good measure, but it must be as precise as possible,” he says. “What may have been quite adequate in the past may not meet our needs in a more dynamic economy where prices and products are changing faster.”

The CPI is often described as the price change of a basket of goods and services typically bought by Canadians. It is used to track real price changes over time and as a measure of the level of inflation in the economy. The concept is simple, but the execution is remarkably complex. The 2011 basket contains more than 600 representative items that are run through a recipe of weighting, quality comparisons, regressions, algorithms and other bits of number crunching.

The enhancement involves three major areas:

• Updating the basket of goods and services
• Improving sampling
• Tracking changes in product quality

Basket updates

The easiest part of the CPI initiative to understand is the move to revise the basket more frequently—every two years, rather than every four years. That change begins next month, on March 27, with an updated basket of goods and services as part of the CPI release for February. This ensures that the mix of products and services that make up the CPI basket is up-to-date and representative of what Canadians buy.

The update involves adjusting the weights of items in the basket. Items are weighted according to consumer spending patterns. The weight of an item provides an indication of its relative importance, compared to all the goods and services in the CPI basket. Updating the basket weights helps us to ensure that they remain relevant and account for changing consumer tastes. With the 2009 basket update, for example, the CPI weights were updated to reflect new products in the marketplace that Canadians had begun to purchase, such as computer tablets and smart phones.

Along with more frequent updates comes a shorter period to process the data. It took 18 months to update the 2009 CPI basket. That will drop to 15 months for the basket update next month. “The goal is 12 months,” says Haig McCarrell, who heads the CPI initiative. “The challenge is to put the CPI updates in a shorter and shorter time frame. Some people would argue that timeliness of new basket weights is as important as frequency.”

Sample improvements

Sampling is also changing under this project. In 2011, the CPI team changed sampling of grocery stores in Toronto, Montréal, and Vancouver to provide a more representative mix of outlets. Where there is national store pricing, tracking prices is an easier task, but regional and local pricing provide a greater challenge. And, of course, some prices, such as gasoline, are more volatile, and must be tracked more frequently than those of frozen French fries or automobiles.

Pharmaceuticals provide a good example of how the process is being reshaped to improve accuracy. At one time, most Canadians filled prescriptions at neighbourhood drug stores. Today, they also buy online, from mail order, or from grocery stores. Generic drugs compete with brand drugs. “The perfect index would track every single purchase. But we cannot measure every drug sold through every market channel in Canada, so our approach is to find a formula that reflects actual purchases,” Mr. McCarrell says. “Multiply the process for the entire CPI, and you have some idea of the complexity of the work involved.”

Product adjustments

The agency is also developing methods to take into account how price change is affected by changes in the quality of a product. How much of a price change results from changes to the product? Is the 2013 dress shirt the same as the 2012 dress shirt? What fabric? Thread count? How many pockets? More bells and whistles? The CPI initiative will expand the use of more complex statistical methods to model the characteristics of a product, and to calculate how much of a price increase is related to different factors. Accurately measuring price change ensures that the prices collected reflect a product of the same quality over time.

Of course, technology aids innovation. As envisioned by the CPI team, the future involves a paperless world, where data are collected and aggregated using the most robust and up-to-date technology available. And, future data sources could include an increasingly complex mix of third-party databases, product code downloads, or information from the Internet.

“The process will be constantly renewed to be current with best practices,” Mr. McCarrell says. “We want a well-oiled machine so that, like a pit crew, we can update the basket and quickly get the racing car back on the track.”

Readers interested in learning more about the CPI can check out a new CPI Reference Manual, the first update since 1992, which will be released online in the fall.

 

Next month: Survey of Financial Security