Chapter 3 – Scope of the Index

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• Population Coverage
• Geographical Coverage
• Product Coverage
• Prices used in the Consumer Price Index
• Time Represented in the Consumer Price Index

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3.1 The scope of the Consumer Price Index (CPI) is defined to indicate what the CPI is intended to measure. Since there are many uses of the CPI, its scope has been defined to suit as many purposes as possible. However, the diverse uses of the CPI mean that it may not suit any one purpose perfectly and therefore awareness about the scope is necessary when using the CPI for a particular function.

3.2 The CPI indicates the average price change of a fixed basket of consumer products purchased by Canadian private households. Therefore, the scope consists of transactions, for the purpose of consumption, between households in Canada and establishments operating in Canada. Only those transactions for purposes of consumption are included in the CPI. Therefore, investment expenditures, that is, transactions made with the intention of acquiring some sort of future purchasing power for example, the purchase of stocks or bonds, are excluded from the CPI. The inclusion or exclusion of particular transactions will be discussed in more detail later in this chapter.

3.3 The scope of the CPI can be mapped to several dimensions, namely: Population coverage, geographical coverage, product coverage, prices and time. The scope is reflected in the product and geographical classifications for which basket weights, derived primarily from the Survey of Household Spending (SHS)^Note 1, are assigned. The intention and ideal scenario is that each good or service in scope for the CPI be represented by observed transaction prices. However, operational constraints as well as the complexity of measuring the vast and continuously changing universe of consumer transactions make this impossible to achieve in practice. As for most statistical surveys, the CPI is based on a sample of collected prices.

3.4 Defining the scope of the CPI is both a conceptual and a practical exercise. The fundamental question regarding scope is: Does measuring the prices for a particular good or service fit the uses of the CPI? While there are many products for which prices could be collected, they may not necessarily suit the purposes of the index and therefore could be excluded from the scope. There are also some products which may be determined to be in scope for the CPI but for which it is too difficult to estimate consumer expenditures and/or price change. For these goods or services it is generally better to define them as out of scope than to include them without adequate measurement options.^Note 2 The following sections of this chapter will discuss the conceptual and practical questions surrounding the scope of the CPI.

Population Coverage

3.5 The CPI target population is the group of people whose consumption expenditures are in the scope of the index. For the CPI, the target population consists of families and individuals living in urban and rural private households in Canada.^Note 3

3.6 The definition of private households in the CPI is consistent with that used in the Canadian Census of Population.^Note 4 Consumption expenditures made by people living in institutions or collective households (e.g. prisons or long term health care facilities), as well as members of the Canadian Forces living in military camps, are excluded from the CPI scope. Expenditures made by people living on First Nations reserves are also excluded from the CPI. The decision to exclude these expenditures is primarily based on the operational difficulty of collecting data applicable to these households.

3.7 The aim of the CPI is to measure domestic consumer price change, meaning that only transactions between the target population (private households in Canada) and establishments (businesses or governments) operating in Canada are in scope. Therefore, transactions made outside of the country (e.g., restaurant meals bought while on vacation in Brazil) or transactions made with online establishments that do not physically operate within the borders of Canada are not in scope for the CPI. However, online establishments that do have physical operations in the country (e.g. a shipping warehouse) are included in the CPI.

3.8 In practice, the CPI does not strictly follow a 'domestic' approach because the weights used to compile the CPI basket, which are derived primarily from the SHS, follow the 'national' concept. This means they may include household expenditures made outside of the country. Additionally, the SHS does not include spending by foreigners while visiting Canada. While these expenditures are included in final domestic demand, it is not desirable to include them in the CPI given that the index's primary uses include determining domestic monetary policy and adjusting payments of wages of Canadian residents and businesses.

3.9 Having basket weights that follow a 'national' approach has a minimal impact on the CPI given that the proportion of consumer expenditures made outside of Canada relative to the expenditures made in the country is small. If data were available on the proportion of the consumer expenditures, by product, that were made out of the country, Statistics Canada could make efforts to remove this spending from the CPI basket. Alternatively, if the expenditure data were available efforts could be made to estimate the price change for the out-of-country transactions. However, the lack of data and the operational challenges in trying to estimate out-of-country price change make these options impractical. Moreover, including price change of out-of-country transactions is not suitable for the use of the index in guiding Canadian monetary policy.

Geographical Coverage

3.10 The CPI covers price change experienced by private households in the ten provinces as well as Yellowknife, Whitehorse and Iqaluit. Price change in all other areas of Yukon, the Northwest Territories and Nunavut are excluded from the scope of the CPI. While it would be desirable to include transactions made by private households in all areas within each Territory, from an operational perspective it is not practical to collect prices outside of Yellowknife, Whitehorse and Iqaluit. The decision to exclude areas outside of the main urban centres in Yukon, the Northwest Territories and Nunavut is based on the assumption that price change in the cities does not acceptably reflect price change in the remaining regions of the Territories. Therefore, the decision was made to limit the scope of the CPI to the three northern capital cities.

3.11 All areas within the ten provinces and the three northern capital cities are in scope for the CPI, meaning that movements in the indices represent price changes for the entire province or city specified. However, because of operational constraints having to do with price collection, generally prices are only collected in more heavily populated areas within each province. The rationale for only collecting prices in more populated areas is based on the fact that total consumer expenditures are greater in areas with more residents, so the basket weights for the less populated areas would be quite small. Additionally, there is an assumption that price changes in less populated areas generally follow similar trends to price changes in populated areas. In this context it is important to keep in mind that the CPI aims to measure price change, not price levels.

Product Coverage

3.12 The CPI measures price change for consumer products, which are goods and services that are purchased for the purpose of consumption. For the most part, products included in the CPI must be associated with a transaction price, that is, with an amount of money that a consumer must pay to purchase a specific quantity and quality of a good or service.^Note 5

3.13 Strictly speaking, long-lived assets are excluded from the CPI. This is because they are not purchased primarily for consumption in the near future. However, distinguishing between expenditures on products for consumption and expenditures on assets for investment purposes can be quite complex for many consumer product categories, the most challenging of which is housing. Housing is seen as an asset, a durable good which provides positive economic value over an extended period of time, so house prices are not directly included in the CPI. However, a house is also consumed gradually over time by the person living in it. This is why house prices enter indirectly into the measurement of the CPI component for owned accommodation. Separating the asset portion of the house from the consumption part of the house is not simple either in concept or in practice and this is why the treatment of owned accommodation is one of the most debatable issues surrounding the construction of CPIs around the world.^Note 6

3.14 In addition to housing, there are various other product categories in which it is difficult to distinguish between consumption and investment. For this reason, a selective approach is employed in the CPI. For instance, in the category of insurance, premiums for homeowners' and tenants' property insurance as well as vehicle insurance are included in the CPI scope because their premiums are related to specific goods and services (the contract normally guarantees the replacement or restoration of specified goods). In contrast, life and disability insurance are excluded because the payments stipulated in the insurance contract may be interpreted as representing future purchasing power, which cannot be identified with the consumption of any specific good or service.

3.15 While investments are excluded from the scope of the CPI, additional costs associated with making an investment transaction such as commissions or fees paid to stock brokers are included in the CPI. These fees are associated with a service provided by a financial institution and are consumed by the purchaser.

3.16 Transfers are transactions where no specific goods or services are received in exchange for payments made. Income taxes are an example. Because transfers are not associated with the acquisition or consumption of specific products they are out of scope for the CPI.^Note 7 Most goods and services financed through the public taxation system (e.g. public education, public health care) are considered transfers even though they are paid for through taxation, because a private household does not receive any specific good or service in exchange for the amount of taxes paid. Most public services are therefore excluded from the CPI.

3.17 However, not all goods or services that are publically provided are transfers. For instance some public goods and services have a direct user fee or cost of consumption associated with them, such as a passport, public transit, or health care charges for private hospital rooms or ambulance fees, and these are included in the CPI. Additionally, transactions made between private households and government-owned utilities or corporations, such as municipal water rates or postal services, are included in the CPI. While property taxes are classified as a transfer for many purposes, they are considered an integral part of the cost of owning and using a dwelling and thus are included in the calculation of the owned accommodation component of the CPI.^Note 8 Other forms of transfers, including gifts, donations to charities, tips and gratuities are excluded from the CPI.^Note 9

3.18 From a conceptual standpoint, second hand or used goods are in scope for the CPI as long as there is a transaction between a private household and an establishment operating in Canada. However, in practice the prices for these products are usually not collected as part of the CPI sample because the associated consumption expenditures generally account for a very small proportion of overall consumer spending.

3.19 Interest that may be levied due to purchases made on credit, such as credit card or bank loan interest charges, is not included in the CPI. The issue of interest charges is very complex, raising both conceptual and practical challenges for which there is no consensus and no clear recommendation.^Note 10 The CPI does include interest paid on a mortgage, as it is deemed an integral part of consuming an owner-occupied dwelling.^Note 11

3.20 Some but not all transactions involving the purchase of illegal or socially undesirable goods and services are in scope for a CPI.^Note 12 The CPI takes a selective approach when deciding whether to include them or not. For example, tobacco products are included while illegal narcotics are deemed to be out of scope. Practical considerations in effectively measuring the prices involved in some of these transactions are a key factor.

Prices used in the Consumer Price Index

3.21 The prices included in the CPI are final prices, inclusive of all excise and other taxes paid by consumers. In particular, they include the Goods and Services Tax (GST), provincial retail sales taxes or Harmonized Sales Taxes (HST), as well as any environmental, liquor and tobacco taxes wherever applicable. It follows that the CPI could change as a result of changes in any of these types of taxes. In contrast, the CPI does not include changes in personal income taxes because as discussed above, these are transfers and are thus out of scope for the CPI.

3.22 Since the CPI includes only those transactions between private households in Canada and establishments operating in Canada, no foreign prices are included in the CPI. The prices of imported goods nevertheless have an important impact on the CPI because many of the products sold by resident establishments are either imported or have significant import content. As a result, changes in the exchange rate of the Canadian dollar against other currencies do have an impact on the CPI since they affect prices for imported goods which are then sold to domestic consumers.

3.23 Discounted prices are included in the CPI as long as they relate specifically to the product in question. That means the sale price cannot be tied to the purchase of another product (e.g. a consumer obtains a discount on a printer with the purchase of a computer). When discounts are offered in kind (e.g. free winter tires with the purchase of a new car) the purchase price is reduced by the monetary value of the product offered in kind.

3.24 The aim of the CPI is to measure the changes in prices paid by consumers and those prices sometimes differ from the associated sticker or list prices. However, data on transaction prices are not always observable for consumer products. Therefore, Statistics Canada collects Product Offers (POs) as proxies for transaction prices. For the CPI a PO is the presentation of a particular good or service, with an associated price, by a retailer to a purchaser. The POs used in the calculation of the CPI are determined by the sample.

Time Represented in the Consumer Price Index

3.25 The smallest unit of time represented in the CPI is one month. That is, the CPI represents price change from one month to another. While in practice, prices are observed at specific moments in time within a particular month, the published indices do not represent price change occurring at any time interval less than one month. Rather, the index measures the change in average prices in one month compared to average prices in another month.

3.26 There are three approaches which can guide decisions about when to collect and incorporate a given set of observed prices in the CPI. These approaches relate to the period in time when goods and services are paid for, acquired (that is, legally owned) or consumed (that is, used). The three need not coincide and would produce different CPIs. The 'payments approach' is taken when the prices relate to the period in which the expenditures for the product are made. The "acquisitions approach� involves observing prices at the time at which the good or service is obtained by the consumer (that is, when the legal ownership of the product passes to the consumer). The 'use approach' entails observing prices at the time when a product is consumed. These times of payment, acquisition and use might extend over more than one month. For many goods and services the difference between these three approaches is not significant, because the times when consumers pay, acquire and use goods and services are typically synchronized. However, for some products, particularly durable goods or large expenditure items, the timing of price observation can yield different results.

3.27 For the majority of products, the CPI aims to follow the acquisitions approach, meaning that the observed prices relate to the transaction cost in the time period in which the legal ownership of the good passes to the consumer. The main reason for following the acquisitions approach is that it is consistent with an accrual accounting system^Note 13 which is used in the Income and Expenditure Accounts in the Canadian System of National Accounts (CSNA).

3.28 There are also practical reasons for choosing the acquisitions approach. One, the data and information that would be required to measure the flow of service arising from the gradual consumption of various products generally makes the use approach an impractical one. Similarly, because many goods and services are purchased on credit, with multiple purchases frequently being amassed on one form of loan (e.g. a credit card whose balance is carried for many months), the consistent application of the payments approach across the CPI is not practical. Therefore, given the benefit of consistency with the accounting principles of the CSNA and Statistics Canada's practice of capturing price information from retailers' posted prices (POs), the acquisitions approach is the most suitable choice for the CPI.

3.29 There are special cases, either for conceptual or practical reasons, that the CPI may not strictly follow the acquisitions approach. A few examples include air fares, travel tours and traveller accommodation. While the observed prices relate to the period in which the consumer obtained ownership of the ticket, travel package or hotel reservation, the prices are applied to the index in the period in which the service is used. For example, if a consumer purchases a travel package in January for a holiday in March, the price is recorded in January (the time when the consumer obtained ownership of the service); however it will not enter the CPI calculation until March (the time when the service is used). In these cases, it is practical to apply a use approach because the exact period when the service is consumed is known with certainty.

Notes