The consumer price index: A measure of inflation

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Objectives

• Students should understand how price changes affect their purchasing power.
• Students should become aware that there may be strategies for dealing with price changes, such as altering their consumption patterns or asking for an increase in allowance.

Method

1. Have the students examine the prices in the table below, and ask them if the costs of school lunches and entertainment have increased or decreased. Ask the students to consider what additional information is required to determine how the price changes will affect their purchasing power.
   
   

   Item	Year 1	Year 2	Year 3
   Sandwich	$1.75	$2.00	$2.05
   Milk	0.75	0.75	0.90
   Apple	0.50	0.60	0.65
   Potato chips	0.60	0.75	0.80
   Tickets for sports events	4.00	4.50	5.50
   Tickets for other events	4.50	5.00	5.75
   Compact discs	18.00	17.10	15.00

2. The students will need to determine the quantity of each item they purchase each week. They can then calculate how much these expenditures would have cost them in first, second, and third year. An example is given below for the first year. Performing the same calculation for 2nd and 3rd year results in expenditures of $29.26 in year 2 and $31.26 in year 3.
   
   

   Item	Quantity Per Week	Average Price	Total Spending Per Week
   Sandwich	5.0	$1.75	$8.75
   Milk	5.0	.75	3.75
   Apple	2.5	.50	1.25
   Potato chips	2.5	.60	1.50
   Tickets for sports events	1.0	4.00	4.00
   Tickets for other events	0.5	4.50	2.25
   Compact discs	0.3	18.00	5.40
   Total	26.90

3. To convert these totals to price indexes, the students should make year 1 their base year. The base year is the year whose prices serve as a base for comparing prices in other years. The base year index is set to 100. To complete the index, divide spending in year 2 and year 3 by base year spending, then multiply these answers by 100.
   
   Answer: For year 2, the students' index is 108.8 (29.26/26.90 × 100); for year 3, it is 116.2 (31.26/26.90 × 100). In this example, in order to buy the same things in year 3 that they bought in year 1, the students would have to pay 16.2% more. The students should now be able to see that the price increases have reduced their purchasing power.
4. Ask the students what strategies they could adopt to deal with the increase in prices. Students might suggest changing their spending patterns, buying cheaper products, asking for an increase in allowance, or getting a part-time job.

Using other resources

• Consumer price indexes can be found in Cansim Tables 326-0001, 326-0002, 326-0016, 326-0017, and 326-0018 available on Statistics Canada's E-STAT.
• Your Guide to the Consumer Price Index, Statistics Canada, Catalogue no. 62-557-XIB.

Please e-mail comments or examples of how you used this exercise in your class.