An Analysis of the 2017 Consumer Price Index Basket Update, Based on 2015 Expenditures

Introduction

The Consumer Price Index (CPI) is one of Canada’s most important economic indicators and is used to support monetary policy, and adjust wages and social benefits. The CPI measures the change in the cost of a basket of goods and services that is typically purchased by Canadians.

To calculate the CPI, Statistics Canada relies on information on observed consumer prices and expenditures. Expenditure data are used to define the basket of goods and services for the CPI and derive basket weights for each index component (consumer good or service). Weights represent the relative importance of all the goods and services in the consumer basket and are integral to estimating consumers’ experience with price inflation (the change in prices over time).

Basket weights are derived primarily from Statistics Canada’s Survey of Household Spending (SHS) and are updated on a two-year frequency. The January 2017 CPI marks the introduction of updated basket weights in the calculation of the index. As of its release on February 24, 2017, the basket weights used in the aggregation of the CPI refer to consumer spending patterns from the 2015 SHS, replacing those from the 2013 SHS.

This document will outline key information related to the basket update and highlight some noteworthy changes in basket weights effective with this update.

For more information on basket weights and the aggregation of the CPI, please refer to The Canadian Consumer Price Index Reference Paper on the Statistics Canada website.

Classification Changes and Index Base Period

The CPI classification of goods and services is organized according to a hierarchical structure (see pyramid, below). At the top of the structure is the All-items CPI, below which are eight major components. The major components are particularly useful for analytical purposes since they provide an indication about the sources of monthly and annual inflation. At the lowest published level ^{Note 1} of the classification, there are 175 basic aggregates. These basic aggregates are the result of aggregating one or more elementary aggregates, which are unpublished.

Description for Chart 1

The Consumer Price Index classification is organized according to a top-down hierarchal structure, depicted in a pyramid chart with five levels. At the first level, or the top of the pyramid, is the “All-items Consumer Price Index”. Below at the second level of the pyramid are the eight major components which are:

• Food;
• Shelter;
• Household operations, furnishings and equipment;
• Clothing and footwear;
• Transportation;
• Health and personal care;
• Recreation, education and reading;
• Alcohol beverages and tobacco products.

At the third level of the pyramid there are “Intermediate level aggregations”.

At the fourth level of the pyramid there are “175 basic aggregates”.

At the fifth and lowest level of the pyramid there are “700 elementary aggregates”.

No changes were made to the calculation of the CPI at this basic aggregate level with the introduction of the 2015 basket weights. However, while the classification structure remains intact at this level for the purposes of index aggregation, two basic aggregate indexes will no longer be published due to their small basket weights: rental of digital media, and other home entertainment equipment, parts and services.

Below the basic aggregate level, a small number of changes were implemented to unpublished elementary aggregates. For example, new elementary aggregates for purchase of luxury passenger vehicles were added to the basic aggregate purchase of passenger vehicles, given their increasing shares in consumer passenger vehicle expenditures. Conversely, DVD rentals elementary aggregate, given its reduced expenditure share in the 2015 reference period, was deleted from the rental of digital media basic aggregate.

The time base of an index is the period in which the index is equal to 100. For the Canadian CPI, the time base is usually a calendar year and is expressed as “index year=100.” The current time base remains “index 2002=100.”

Analysis of Basket Weights

Considerations

When evaluating basket weights (shares of overall expenditures) of goods and services between periods, we observe three possible outcomes:

1. an increase in basket weight, whereby expenditures for a category of goods and/or services account for a larger proportion of overall expenditures;
2. a decrease in basket weight, whereby expenditures for a category of goods and/or services account for a smaller proportion of overall expenditures; and,
3. no change in basket weight, whereby the expenditures for a category of goods and/or services account for the same proportion of overall expenditures in each period.

It is important to note, however, that expenditure share is a relative measure. Basket weight changes are a function of the expenditure growth within a given category, as well as the growth rate of all other expenditures in scope of the CPI. A basket share that is declining between periods does not necessarily mark a decline in expenditures between those periods, nor does an unchanged basket share reveal that expenditures were constant between the periods. Rather, this indicates that any rate of growth, if at all, in that category was less than the rate of growth of overall expenditures.

For the following analysis of basket weight changes, it is also important to consider the effect of rounding on basket weights. Given that basket weights are rounded and published at the second decimal place, as displayed below, small changes in expenditure share may not be apparent. Basket share changes of smaller magnitudes are, however, accounted for in the CPI, as full-precision expenditure weights are used in its calculation.

Findings by Major Component

The CPI basket weight for food increased from 16.07% in 2013 to 16.45% in 2015. Within food from stores (accounting for 11.36% of the basket in 2013 and 11.54% in 2015), meat experienced the largest growth in basket share, rising from 2.05% in 2013 to 2.24% in 2015. All subcomponents of meat grew in the 2015 basket, with the exception of other fresh or frozen meat (excluding poultry). Between January 2014 and October 2015, the CPI recorded a 17.7% increase in the price of meat,^{Note 2} which contributed to rising expenditures between basket reference periods.

An increase in expenditure share was also recorded for food purchased in restaurants, which now accounts for 4.92% of the CPI basket. Expenditure shares for each of its subcomponents, comprising purchases from table-service restaurants, fast food restaurants, and cafeteria and other restaurants, grew at approximately the same pace.

Shelter’s share of the CPI basket reached 26.79% in 2015, as the share of rent charges rose from 5.67% in 2013 to 6.20% in 2015. Homeowners’ replacement cost, which is related to the market price of new homes, also took on a greater importance in consumer expenditures; this cost now accounts for 4.80% of the CPI basket. In contrast, the mortgage interest cost index has taken on a smaller basket weight with each basket update since 2009, partly reflecting gradually lower rates offered by commercial banks over this period.^{Note 3}

The household operations, furnishings and equipment major component recorded continued growth in its share of the CPI basket between 2009 and 2015, rising from 11.84% to 13.01% over the period. One source of persistent growth was in the expenditures for Internet access services, consistent with the increasing popularity of, and demand for, the Internet since its establishment.^{Note 4}

In 2015, consumers spent a smaller share of their overall expenditures on clothing and footwear. This major component’s basket weight declined from 6.25% in 2013 to 5.68% in 2015. While women’s clothing expenditures led the drop, declining basket shares were broad-based within the major component.

The basket weight for transportation expenses declined from 20.01% in 2013 to 19.48% in 2015. This decline was mainly attributable to a decrease in gasoline expenditures; between the 2013 and 2015 baskets, the basket weight for gasoline declined from 4.77% to 3.49%. This change coincided with a fall in the price of crude oil on the world market, which contributed to lower gasoline prices. Between September 2014 and January 2015, the price of crude oil fell by 50.1%.^{Note 5} Low crude oil prices persisted through the 2015 basket reference period.

Among transportation components, increasing expenditures on passenger vehicles partially offset declining expenditures on gasoline. The basket weight for the purchase and leasing of passenger vehicles increased from 7.28% in 2013 to 7.87% in 2015.

The basket weight for the health and personal care major component grew between 2013 and 2015, and now accounts for 4.98% of the CPI basket. Goods and services in this category both recorded rising basket share. Additionally, growth in the expenditure share of non-prescribed medicines was offset by declines in the weight of prescribed medicines.

Expenses on recreation, education and reading, as a share of overall expenditures, declined between 2013 and 2015. This major component now accounts for 11.02% of the CPI basket. Declines in the basket share of education and reading more than offset increases in recreation. Among the components of education and reading, the only increase in basket weight recorded was in tuition fees (from 2.08% in 2013 to 2.10% in 2015).

Increases in the expenditure share of recreation were mainly attributable to gains in travel tours (basket weight increase from 1.00% in 2013 to 1.25% in 2015).

Since its inception in 2009, the basic aggregate multipurpose digital devices has seen its share of expenditures grow with each basket update. Accounting for only 0.04% of the basket in 2009, multipurpose digital devices now accounts for 0.23% of the CPI basket, highlighting the continually increasing role of digital devices, such as smartphones and tablet computers, in the lives of Canadians.

Alcoholic beverages and tobacco products, the smallest of the major components in terms of its share of the CPI basket, recorded its third consecutive decline in basket weight (down from 2.97% in 2009 to 2.58% in 2015) since the introduction of two-year frequency basket updates. This partly reflects the changing smoking habits of Canadians.^{Note 6} Over this time, the basket weight of cigarettes in the CPI has declined from 1.14% in 2009 to 0.89% in 2015. The smaller share of cigarette expenditures observed in the 2015 basket is of additional interest, as expenditures in dollar terms also declined from the previous basket reference period. This was not true for the 2009, 2011 and 2013 basket updates, when the basket weight for cigarettes declined, despite rising expenditures.

Among the subcomponents of alcoholic beverages, the basket weight for beer served in licensed establishments (0.26% in 2015) has grown with the last two basket updates. This is in contrast to a declining expenditure share for beer purchased from stores (0.48% in 2015) over the same period.