Chapter 4 – Classifications

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4.1 The product and geographical classifications for the Consumer Price Index (CPI) are designed to meet three important criteria: 1) the classification reflects economic reality faced by consumers; 2) the classification meets the needs of index users, and 3) the classification is unambiguously mutually exclusive and exhaustive.^Note 1

4.2 The product classification is a hierarchy of 691 elementary product classes up to the All-items CPI.^Note 2 There are several intermediate aggregation stages that are relevant for different levels of analysis, including the eight major aggregates ("Food�, "Shelter�, "Household operations and furnishings�, "Clothing and footwear�, "Transportation�, "Health and personal care�, "Recreation, education and reading�, and "Alcoholic beverages and tobacco products�).

4.3 The geographical classification is a hierarchy of 19 geographical strata which aggregate to Canada. Most provinces and the three northern capital cities are represented by one stratum each. However, Quebec, Ontario and British Columbia are divided into three, four and two strata respectively. The allocation of strata within these provinces is based on Economic Regions defined by the Canadian Census of Population.^Note 3 While indices are computed for each geographical stratum, indices are only published for Canada, the provinces, Yellowknife, Whitehorse and Iqaluit.

4.4 The intersections of the product and geographical classifications constitute the elementary aggregates of the CPI. Elementary aggregates are the lowest-level classes to which a set of fixed-quantity basket weights is assigned. For this reason, indices for elementary aggregates are the primary building blocks to construct all indices at higher aggregation levels. Additionally, they constitute the smallest elements by which it is possible to analyze and explain price movements at aggregate levels. Finally, elementary aggregates also serve as strata for price sampling with the purpose of enhancing the reliability and relevance of the indices that are derived from samples of collected prices.

4.5 Beyond these basic rules, the designation of elementary aggregates is a matter of compromises and balances between different, often contradictory, requirements. For example, creating many very detailed elementary aggregates could be advantageous as a guide for sampling. Narrowly defined groupings of goods and services and geographies are more likely to be homogeneous from the viewpoint of price changes, which would in turn enhance sampling efficiency. On the other hand, when elementary aggregates are looked at as building blocks of the CPI it becomes essential that the indices exhibit reasonable statistical reliability. This would be difficult to achieve for numerous detailed product and geography groupings without very large price samples.

4.6 With all of this in mind, in addition to the requirement of supporting the analysis of consumer price change by various users, effort is made to designate elementary aggregates as groupings of products and geographies that:

• 4.6.1 Have clear and economically meaningful content.
• 4.6.2 Make possible the production of consumer price indices of acceptable statistical quality, given the available resources.
• 4.6.3 Have a reasonable degree of homogeneity in the product and geographical dimensions.

4.7 The imperative characteristic of a classification, that it must be exhaustive (covering all goods and services and geographies within the scope of the CPI) as well as mutually exclusive (no product or geographical stratum can belong to more than one elementary aggregate), gives rise to the possibility of 691x19=13,129 elementary aggregates from the CPI classification. However, the number is smaller in practice due to lesser product detail in some geographical strata.

4.8 Elementary aggregates are the basis of the fixed-basket concept of the CPI. Indices for elementary aggregates (lower level) are the starting points of the CPI aggregation using the Lowe fixed-basket formula (upper level).^Note 4

4.9 The Canadian CPI also makes use of basic classes, a chosen point in the classification in which the quantity weights are unchanged for the duration of the basket. This means that the quantities for elementary aggregates below the basic class level may be adjusted during the lifespan of a basket as long as the quantities at the basic class level are unchanged.^Note 5

4.10 In many cases, basic classes are equal to elementary aggregates. For the CPI, basic classes are also the lowest level at which indices are published.

4.11 In an effort to further support the analysis of consumer price changes, many special aggregates are also produced. Special aggregates such as, "Goods�, "Services�, "All-items excluding Food and Energy�, and "The Bank of Canada's Core Index�,^Note 6 are constructed by aggregating different groups of elementary aggregate indices. These special aggregates are analytically helpful and are useful in understanding the contributions of certain elementary aggregates to overall price change.

Notes