Eh Sayers Episode 5 - Why Should You Care About Inflation?

Release date: January 27, 2021

Catalogue number: 45-20-0003
ISSN: 2816-2250

Eh Sayers podcast

The COVID-19 pandemic has had an undeniable impact on the way that we spend money. Documenting these shifts in spending patterns is crucial to decision making and providing Canadians with timely and accurate information on consumer price changes. The Consumer Price Index (CPI) is the most widely used indicator of consumer price change and inflation in Canada. Our guest, Taylor Mitchell, an economist at Statistics Canada, explains why the CPI is an important tool for setting economic policy and monitoring economic conditions. She will also shed light on why you should care about inflation, its impact on different population groups and the cost of living.


Tegan Bridge


Taylor Mitchell, Economist for the Consumer Price Index at Statistics Canada

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Eh Sayers Episode 5 - Why Should You Care About Inflation? - Transcript

Tegan:Hi everyone. Quick programing note before we start today's show. The main interview was recorded in November, and while everything was correct at the time of recording, the world of data moves fast, so some of our examples may not contain the latest information. That said, the main points of the show are still as relevant today as the day we recorded them, and we hope it doesn't detract from your podcast listening experience. Enjoy!


Tegan: Welcome to Eh Sayers, a podcast from Statistics Canada, where we meet the people behind the data and explore the stories behind the numbers. I’m your host, Tegan.

If you’re an economics-minded person, you’ll know that in December 2021, the CPI was up 4.8% from the year before. Even if you’re not, you've probably noticed that prices have been going up. I feel like I’m spending more on my groceries than I was a year ago, but I don't think the cost of my clothing has really changed. I have questions. And I bet you do too. To get some answers, we sat down with an economist from StatCan.

Taylor: My name is Taylor Mitchell. I am an economist, working on the CPI or the Consumer Price Index, which is one of Canada's economic indicators of consumer inflation.

Tegan: Big question, what is inflation?

Taylor: What is inflation? Inflation is essentially the change in prices over time. So what the CPI does is it tracks that change in consumer goods, everything that consumers purchase on a daily or monthly or yearly, semiannually basis. Everything from the groceries we buy to the rent we pay, to our haircuts, to our entertainment. It's all in this one basket and we track how that the price of that basket changes overtime.

Tegan: So, you said CPI. What is the CPI?

Taylor: So the CPI is the consumer price index. It's an economic indicator, and it is a measure of how prices change through time. It's often used for a number of a number of important purposes. It's it's a gauge of the health of the economy. It's also used for purposes that are quite relevant to Canadians, day-to-day. Everything from indexing tax brackets to indexing pension payments, and other government benefits to ensure that purchasing power remains constant over time so that you still can purchase the same number of goods with the dollars that you have.

Tegan: And how do you actually gather that information?

Taylor: We start with the basket so we have--a virtual basket I should say. So I'm I spoke a little bit about this before. The basket includes eight major components, which are food, shelter, household operations, furnishings and equipment, so that includes everything from buying furniture, so buying a couch, to buying a fridge, to paying some basic household bills, like cellular bills or financial services, things of that nature. The basket includes clothing and footwear. It includes transportation, which is everything from buying airline tickets, to buying gas, to paying for the bus. It includes health and personal care, recreation, education and reading, and alcoholic beverages, tobacco products, and recreational cannabis. So that's kind of the main framework and each month. We collect through various means a number of prices for various products to represent those. Those 8 major components. So when it comes to grocery prices, for instance, we do that by using transaction data. So when you go to the grocery store, we're actually using that price of the groceries that were scanned at the cashier, and that's incorporated into the CPI. Uh, for other types of goods and services we send interviewers into stores and they record the actual price that’s on the shelf. Uhm, now as we modernize the CPI, we're we're getting more and more into things like API's.

So for various travel indexes, for example, for air transportation, were able to access that data through an API. And we also do a great deal of online price collection now and and because of the pandemic, actually we're we're pretty much exclusively using the non-in person forms of price collection so prior to the pandemic I should say we used to send interviewers into stores, but now that's on hold as a result of physical distancing measures. So the bulk of our collection is now done through alternative data.

Tegan: I like the picture in my head of an economist going in and buying just different kinds of butter. Salted, unsalted, in different sizes and then comparing all the prices.

Taylor: And that's essentially what we do. We look at different types of goods for each, so you know you use the example of butter. We do look at different types of butter. We look at goods of all sizes. We adjust for the quantity to ensure that the price is not falling or staying the same, but that the quantity is the same so we adjust for for so-called shrinkflation in that way. Uh, and then once prices are collected, it's a complex but very robust statistical process that takes, you know over 100 people to do every month to produce that one number that represents inflation for the entire country.

Tegan: What is what is shrinkflation?

Taylor: So shrinkflation refers to typically when product sizes shrink, so product packages shrink in size. Uhm, and when that happens when you know, say, the size of the peanut butter jar that I buy when that gets smaller in size. I'm getting less for more. so that's considered a type of inflation, because again, you are paying more, but getting less or perhaps paying the same beginning, less so when it comes to shrinkflation the way we address that in the CPI is we receive quantity, standard quantity sizes with our price information each month, and that allows us to standardize. So, for example, if the price of peanut butter stays the same. But the jar of peanut butter falls in size becomes smaller. That would be, all else equal, considered a price increase because I'm paying more for what I'm getting.

Tegan: Do prices always rise?

Taylor: That's a great question. Typically, the CPI as an aggregate that accounts for all inflation for the entire country. For the most part, that has risen year over year historically. With that said, prices for individual components within that basket of goods and services they do sometimes fall over time. So one example would be this past year, so you know, we often we were very aware of how much more we're paying for gasoline or for meat at the grocery store, but we do have a number of products that are actually less expensive now than they were at this time last year. Uhm, mortgage interest costs. We've had historically low interest rates and that's passed along to people who are entering or renewing their mortgages. Uh, telephone services. That's your cell phone service. Uh, now we get more and more data typically involved in those packages and so that means it's a de facto price decline. Car insurance is costing Canadians less than it was a year ago. Fresh vegetables. So to answer your question, there are fluctuations, and there are some goods and services where prices do fall over time. Uh, and then there are other goods where prices. They don't really move that much from year to year. One example might be clothing.

Tegan: And are all price increases due to inflation all the time always?

Taylor: Well, inflation is kind of a general catchall term for prices that rise as opposed to deflation, which is when prices fall. So in a general economic sense, yes, when prices rise, that is, that is inflation. But I'm wondering if what you're getting at might be kind of why those prices increase over time. Like what are the factors at play?

Tegan: Yeah, I mean if you are I don't know off the top of my head if you are. If you are buying a cell phone, a smartphone, say and you bought 2 years ago and it was, I don't know $700.00 and now you buy one today and it's $900. Is that inflation or is that something different?

Taylor: It's inflation, but there are dynamics behind that inflation with price change it really all does in the end come down to supply and demand. If more people want to buy something then there are of that good or service to be purchased. Prices tend to rise. In the case of the smart phone, it may be that more people are interested in that particular smartphone than they have been in the past. It may be that there's some sort of a supply chain disruption which, like we're seeing right now for semiconductor chips that are affecting a number of consumer goods in general there are. There are a number of different factors. But when prices do rise over time, yes, we do attribute that generally, uh, to be inflation.

Tegan: Are there ever disagreements about the inflation rate?

Taylor: We you know, I certainly hear that from my neighbours. Uh, you know I. I have that conversation probably every month when the CPI comes out and I'll hear you know, “2%, 3%, 4%. I'm paying 10 or 15% more than last year.” So I think that that's definitely something that every Canadian has their own experience with. It's important to remember that the CPI is an aggregate that represents the entire country as a group, so it represents households that are very, very different. It represents people that own their homes versus people that rent their homes. It represents Canadians with children and Canadians without children. It represents Canadians that are like me and don't have a car and who take the bus or the train everywhere. And we're not paying for gas every month. It represents older Canadians, seniors and millennials who are paying university tuition. And so because of that within that big group, everyone is going to have their own unique experience with inflation. And actually that's why we created here. It's STATCAN something called a personal inflation calculator, which allows Canadians to input their own expenses every month, and they can see how their own personal rate of inflation does differ from that one number that represents the country as a whole.

Tegan: Could you elaborate on how different people's experiences with inflation would vary?

Taylor: So currently gas prices are up quite a bit compared with last year and part of that is because gas prices were actually quite low last year, and that's that was a result of the pandemic and all kinds of disruptions to both demand and supply. But this year gas prices are up about 41%, so that's quite a large increase, and that's certainly affecting some Canadians more than others. You know I mentioned that I'm a person that I. I ride the train. I take the bus, I live in an urban area where I'm fortunate to be able to do that. I don't own a car, but for Canadians that live in different, you know for Canadians who drive to work for Canadians that live in rural areas, they're absolutely going to be feeling the impact of that on their pocketbooks more than somebody like me. At the same time, you know we, renters and homeowners have different experiences with inflation. Those with kids certainly have unique experiences. There are also different regional realities. So, one area that I like to highlight is home heating so the CPI encompasses Canadians from all 10 provinces as well as the three territorial capitals and one aspect about our day-to-day lives is actually quite different in different parts of the country. Is how we heat our homes. So the Atlantic region they tend to rely quite heavily on furnace oil to heat their homes, and furnace oil tends to firm so prices tend to move quite closely with oil prices or gasoline prices. So furnace oil prices are also up quite significantly right now. Whereas West of Quebec, we tend to rely more so on natural gas. Natural gas prices are up as well, but only about half as much as furnace oil prices, and so this means that Canadians in the in Atlantic, Canada are certainly feeling a greater impact on those day-to-day expenses than then those of us using natural gas.

Tegan: In October of 2021, I was curious about the personal inflation calculator, so I played around with it a bit, exploring how inflation would affect people across the country.

I used some guesses about household expenses for a renter in Vancouver, BC, let's call her Beatrice, and came up with a personal inflation rate of 3.9%. BC's actual rate was 3.8%.

I used all of the same numbers for someone in rural PEI, I'll call her Aisha, with the only difference being that Aisha was a homeowner, so she didn't have to pay rent, but she would have some other housing-related expenses. Aisha’s personal inflation rate was 5.6%, higher than Beatrice's 3.9% in BC, but still lower than PEI’s official rate of 6.6%.

Playing around with the numbers in the tool really helped me understand how inflation affects people differently. I encourage you to check it out if you are also curious!

Tegan: You mentioned gas, could you share some examples of other goods affected by inflation? Any other notable changes or anything that you've noticed in the past little while?

Taylor: One area that's been getting a lot of attention has been housing costs, so I will I'll talk a little bit about how shelter is measured in the CPI, just to give you a bit of background. The CPI includes consumer goods. It's right there in the name, consumer price index, and a house itself is not considered a consumer good because we don't consume it. It's considered an asset. It doesn't necessarily change your net worth to purchase a house. So therefore in accordance with international standards, the way the CPI accounts for housing is to measure changes in the costs of the ongoing expenses associated with homeownership. So that would be things like property taxes, that would be things like the commission when you buy a house, that would be your the interest on your mortgage. One area where we're seeing a lot of growth lately is what we call replacement costs. Homeowners replacement costs, and that essentially would be the amount of money that it would take you if you were to rebuild your home on the piece of land that you own. So it's a bit of a tricky concept to wrap our heads around for sure, but it's very closely linked to the price of new homes. And of course we have seen quite a bit of growth in the housing market in the past year and a bit. And so we are currently seeing higher replacement costs than we've seen since the late 1980s. Which is currently it, which is definitely affecting those who are in in the market for new homes. At the same time, you know I mentioned earlier, that interest costs are at a historic low and they have been since the onset of the pandemic, so the flip side of that is that those paying interest on a mortgage are currently enjoying the largest decrease in history. So that's been one trend that we've been watching, those, uh, those inverse relationships regarding shelter.

We're also paying a lot of attention right now to supply chain disruptions, so there are a number of factors there we've seen shipping costs that are that have been quite high. We've seen the impact on a number of consumer goods, especially those that are being imported from overseas, and we're also contending with shortages, so there's been a a fairly well publicized shortage of semiconductor chips, which is in particular impacting the production of new cars and that shortage of new cars is leading to the largest price increases there since the early 90s. So that's a factor that we're also paying a lot of attention to right now.

Tegan: Could you talk a little bit more about what impact the pandemic specifically has had on inflation?

Taylor: Yeah, absolutely so the early price impacts associated with the COVID pandemic, largely to do with a few key areas, one of which was energy. We saw the largest one, two punch in terms of its decline in energy prices in March and April of 2020. Uh, it was an extremely notable decline in prices and that was just because there were some fairly sudden significant changes in terms of how we were all living our lives. We were all staying at home. We were, you know, many of us were not commuting to work anymore. We certainly weren't flying across the ocean. International commerce and trade and just general economic activity, it slowed dramatically. And as a result of that, there were some pretty sharp declines to demand for oil, which of course we saw here in Canada reflected as incredibly low prices at the gas pumps. So, so that was an initial impact, and since then we've seen prices recovering in terms of oil and the reason I bring it up now you know nearly 18 months later, it's because we are still contending with the year over year impacts of those low oil prices in those low gasoline prices from last year. I mentioned that gasoline is up over 40%, but a lot of that is actually just because prices were low this time last year and we're comparing from a low, and so that makes this year's price increases look even larger when we when we look at it in terms of a year over year increase. That's what we call a base effect. That that hasn't impact on that indicator.

We also saw prices for clothing decline towards the beginning of the pandemic and in the early days that was largely because retailers were kind of forced to pivot and discount their inventories online in order to move product. But now it seems to be a bit about longer term trend. Uhm, a lot more people are working at home or just in general staying closer to home. And we're not necessarily buying the same types of clothes that we used to buy, so it's really interesting to see how that's playing out. And, as well, I just want to highlight again just the number of supply shortages that we continue to contend with. We're seeing it, you know, I mentioned shipping costs and semiconductors, but another area where we're really seeing a lot of issue from supply chain disruptions is food prices, particularly meat prices. We've been seeing some labor shortages there that have slowed down production. Some higher prices for livestock feed and just in general of a number of challenges to the supply chain that are leading to higher meat prices for Canadians here and meat prices are up close to 10% right now compared with a year ago.

Tegan: Why should the average Canadian care about inflation?

Taylor: The average Canadian should care about inflation because it's a reflection of how their purchasing power is changing over time. When prices rise, if I have the same amount of money that I had a year ago, I can buy less. I can buy fewer goods and services, and if I'm a person that wants to, you know, keep my spending relatively constant from time to time. I care about inflation, but I also care about inflation because it does affect Canadians in some very practical ways. It impacts their tax brackets. Tax brackets are updated every year based on the CPI. If I'm a senior and I'm collecting CPP, I certainly care about inflation because my CPP payments are going to be indexed to the CPI to ensure that I still have the same amount of purchasing power year to year. Many Canadians who collect private pensions also see their payments index to the CPI. In general, the CPI is used as a gauge of economic health.

Taylor: You know, at the end of the day. I'm in economist that works on prices all day, but I'm also a Canadian and I'm a consumer and I'm a grocery shopper and when I hear that question, what I think about is when I'm in the grocery store and I want to buy some bacon and I see that it's 20% more expensive than it was a year ago. I think that every Canadian can relate to that. That sense of frustration, and I think that that is why the CPI is important. That's why we provide as much information as we do to Canadians about how prices are moving and what is affecting them, because that's, I think, an experience that that everybody can relate to. And at the end of the day, I think that's why Canadians should care about inflation.

Tegan: Is there anything about inflation that we haven't already talked about or about the CPI that? Would be really important for Canadians to know. Or just that you think is cool or interesting?

Taylor: I think I've already touched on everything that's awesome. You know, in, general I just want to stress again that some. Everybody has their own experience with inflation. I'm speaking with you right now and I know that you and I are experiencing different levels of inflation right now. So I always like to point Canadians to our personal inflation calculator. It's a very cool tool. It's a very cool way of kind of seeing your unique circumstances as far as inflation goes and seeing how your circumstances do differ from that one number that represents the entire country.

Tegan: If someone wants to learn more about the CPI or inflation, where should they go?

Taylor: So Statistics Canada has a CPI portal. It is essentially a one stop shop for all things CPI. It includes data visualization tools where Canadians can kind of look at the numbers and play with play with different indexes of interests and see how it's all looked historically it includes the personal inflation calculator, and it includes a number of our other analytical articles as well as the analysis that accompanies are release each month. So I would encourage Canadians to check it out. CPI portal.

Tegan: And that’s our show! You’ve been listening to Eh Sayers. Thank you to Taylor Mitchell, whose expertise powered this episode.

You can subscribe to this show wherever you get your podcasts. There, you can also find the French version of our show, called Hé-coutez bien. Thanks for listening!