Prices and price indexes
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Inflation as measured by the Consumer Price Index (CPI) does not always seem to correspond to individual personal experience. This makes sense because the CPI is based on averages and no individual or household is exactly average. The impact of price increases and decreases on an individual depends on his or her spending habits and types of purchases.
Looking at only one or two components of the CPI—such as gasoline and food prices—can be a bit misleading. From 2009 to 2010, gas prices rose 9.1% while food prices increased 1.4%. But the CPI rose 1.8%.
Although a substantial amount of a household budget is spent on the goods and services that we buy less frequently, we notice price changes in frequent purchases more because we encounter them more often in our daily routines. When thinking about inflation, we tend to pay more attention to them than to infrequent purchases.
From 2000 to 2009, the prices of goods and services Canadians buy frequently—such as gasoline, food, toiletries and bus tickets—rose at an average annual rate of 3.2%, according to the Price Index of Frequent Purchases (PIFP). This was above the 2.1% average annual increase posted for the All-items CPI. It was also well above the 0.7% average increase for infrequently purchased items such as large appliances, cars and holidays.
This trend reversed in 2009 following a large drop in gasoline prices. The All-items CPI rose at an annual average rate of 0.3% during the year, but the inflation rate for frequently purchased items was lower, at 0.2%. Toward the end of 2009, the 12-month decline in gas prices subsided, and in November and December, gasoline prices actually rose on a year-over-year basis. As a result, the PIFP returned to its trend of outpacing the All-items CPI.
Price increases for energy (electricity, natural gas, fuel oil and gasoline) and food accounted for much of the substantial increase for frequently purchased items from 2000 to 2009. Over this period, costs for energy products increased at an average annual rate of 4.6%, and food prices rose 2.8%. Both were sharper rises than the average annual increase in the All-items CPI.
In particular, rising prices for meat (3.2%), dairy (3.4%) and bakery (4.5%) products were the prime contributors to rising food prices. The primary contributors to rising energy costs were a 5.3% increase in gasoline prices and a 5.6% increase in natural gas prices. Also putting upward pressure on the PIFP were higher prices for tobacco products and restaurant meals. From 2000 to 2009, the PIFP was volatile and was the primary source of inflation pressure on the All-items CPI.
Throughout the same decade, price increases for the Price Index of Non- frequent Purchases (PINFP) slowed. This was primarily owing to an average annual drop of 1.5% in durable goods prices during the period. These include items such as vehicles (-1.4%), computer equipment and supplies (-15.7%), clothing (-1.5%), video equipment (-7.3%) and appliances (-1.4%).
A large portion of the items in the PINFP are subject to rapid technological change, and this leads to product quality enhancements. These enhancements are the main reason that prices for computers have declined over the last decade while computer processing and storing capacities have rapidly increased.
Offsetting these drops somewhat were price increases over the past 10 years for a number of services included in the PINFP, such as homeowner's replacement costs (4.3%), tuition fees (4.2%), home maintenance and repair services (2.7%) and health care services (3.5%).
The average annual increase for items covered by some form of contract—such as insurance, renting and leasing vehicles, mortgage interest costs and property taxes—was 2.5%, which was more in line with the rate of growth for the All-items CPI.
The primary contributors to the rise in the Price Index of Contractual Purchases (PICP) were a 5.2% average rise for auto insurance and a 2.2% average increase in mortgage interest costs. Also putting upward pressure on the PICP were an increase in property taxes (2.5%) and rent (1.4%). Downward pressure came from lower prices for leasing passenger vehicles.
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