Consumer Price Index Fact Check: Measuring inflation during the COVID-19 pandemic and beyond

Consumer prices have been deeply affected by the COVID-19 pandemic and, more recently, global events such as the war in Ukraine. Consumers trying to make ends meet have faced rising costs in many of their day-to-day expenditures. Supply chain disruptions, oil price fluctuations and changes in consumer demand brought on by COVID-19 are some of the driving factors. Statistics Canada's primary measure of inflation is the Consumer Price Index, or CPI. The CPI has reflected the impact of these unprecedented events, hitting four-decade highs throughout 2022.

In this context, some facts about how the CPI is calculated can help to explain how the prices consumers are seeing – for example, on grocery store shelves and at the pumps – are accurately reflected in the CPI calculation each month.

For starters, the CPI offers a big-picture snapshot of consumer spending across the entire country, not the experiences of any one individual or family. The CPI captures, on a monthly basis, the changes in prices for the most common goods and services paid for by consumers.

How is it calculated, exactly? The CPI is based on a broad basket of goods and services (see The Representative Products of the Consumer Price Index) which is divided into eight categories:

• Food
• Shelter
• Household operations, furnishings and equipment
• Clothing and footwear
• Transportation
• Health and personal care
• Recreation, education and reading
• Alcoholic beverages, tobacco products and recreational cannabis

Within each category, Statistics Canada selects the products that most closely reflect the spending patterns of all Canadians. When we release our monthly CPI figure, it compares the cost of the basket in a given month with the same month one year earlier. So for example, if the headline CPI is 5.1% in January, that means consumer prices have risen 5.1% over what they were in January of the previous year.

In the past, the basket of goods and services used to calculate CPI was updated every few years. But since the onset of the COVID-19 pandemic, we have started to update the basket every year, to account for rapid changes in consumer behavior and other factors.

Here are some answers to the most common questions posed about CPI in the context of COVID-19.

Why doesn't it match my personal spending experience?

It is important to note the CPI may not seem to match the exact experience of individuals, households, or even regions in Canada. This is because consumers, understandably, are more likely to notice – and attach greater importance to – price changes for the things they buy frequently, rather than more occasional purchases. Changes in common items like milk or gasoline are included in the CPI, but the index also includes items that are purchased less frequently, such as furniture, home electronics and clothing, as well as items that have been decreasing in price compared to last year, such as cellular services and car insurance premiums. This can explain how the perceptions and experiences of individual consumers may differ from the monthly CPI.

What about used cars?

With the annual basket update in June 2022, Statistics Canada has introduced a new approach that includes used vehicle prices in the calculation of the CPI, to align with international practices. The introduction of used vehicle prices in the calculation of the May 2022 CPI includes two new series: purchase of new passenger vehicles and purchase of used passenger vehicles.

Introducing used vehicle pricing in the CPI is part of Statistics Canada's commitment to provide the most timely, reliable and accurate data which reflects the experience of Canadians.

We will continue to monitor prices for used vehicles and leverage new data sources for the purchase of passenger vehicles index. This will ensure the CPI remains an accurate, robust and relevant means of measuring inflation.

For more information, consult the technical paper entitled Measuring price change for used vehicles in the Canadian Consumer Price Index.

What about U.S. inflation?

Comparing Canadian inflation rates with those of other countries is tricky. For example, there are several key differences between our calculation of the CPI and that of the United States. Take housing, for example. The United States measures housing as if the owner is renting their own home, while Canada measures all the ongoing costs of owning and maintaining a home. In the same vein, the United States includes a different range of health care costs including hospital, physician services and health insurance as part of its inflation indicator, while Canada includes medicinal and recreational cannabis.

What about food prices?

As for the hot topic of food prices in the CPI, we have the most robust data possible for measuring food prices in Canada — in fact, Statistics Canada uses mostly point-of-sale scanner data received directly from 21 grocery chains across all regions in Canada. Point-of-sale, or transaction data, is the highest quality price data available, as it tracks actual prices paid by Canadians at the till, rather than just advertised store prices. These data are collected on a weekly basis and include sales and promotions where applicable. The agency uses a robust method to select a wide range of representative food products, including name brands and house brands where possible. To protect the confidentiality of those who make and sell the goods we price, Statistics Canada does not publish specific brand names or store names.

When it comes to shrinkflation, the CPI also has that covered. If package sizes shrink while the price remains the same, the CPI adjusts its calculation to show a price increase, all else constant. Similarly, if the quality of a product, such as a cellular service plan, is improved, say from 5 GB to 10 GB of data while the price stays the same, the CPI will register this as a price decrease. This procedure is known as constant quality (see Measuring Pure Price Change in a Constantly Changing World) and it ensures that the CPI measures price changes for the same items in the basket over time.

What about housing costs?

A word about the expenditures that take up the largest proportion of our budgets that is - shelter. Much has been discussed publicly of late about soaring home prices in Canada and whether those changes are adequately captured in the CPI. The short answer is yes: the CPI does accurately reflect the consumption costs of shelter for individual Canadian consumers – those who rent and those who own their own homes.

Let's break it down:

• CPI does include the cost of rent
• CPI does include home insurance, property taxes, utilities and maintenance and repairs: all key shelter costs
• CPI does include real estate transaction costs when people buy a house, such as realtor commission fees and land transfer costs
• CPI does include the replacement cost of a home, which accounts for depreciation and measures the cost of rebuilding the home on an existing piece of land. This represents the costs associated with maintaining the value of the home over time
• CPI does not include the part of your mortgage payment that goes to the principal, because that is considered an investment in an asset which will most likely appreciate over time, and which belongs to you. You do not consume a house as you would other goods and you do not lose this part of your payment

One way to look at this is that when you pay your principal on a mortgage loan, you are moving the money from the debt to the asset side of your personal ledger. You do not lose that money, you are paying into an asset over time. On the other hand, the CPI does include the part of your mortgage payment that goes to pay the interest on the house— this is the portion of your monthly, weekly or bi-weekly payment that is interest only. This is the cost of borrowing the money.

Is there a better way to measure the CPI?

The method used to calculate the CPI follows accepted international standards (see International Monetary Fund - Update of the Consumer Price Index Manual). It is also regularly reviewed internally and by experts outside the agency, and adjusted as needed to ensure it meets best practices.

The CPI is Statistics Canada's primary measure of inflation. It calculates the change in prices of many different products and unique services Canadians consume by presenting a single index number, based on a fixed basket and corresponding weight of items typically purchased by households in Canada.

The headline CPI, our official inflation number, is expressed as a 12-month measure and allows for year-over-year comparisons. This ensures inflation rates can be compared internationally, and follows standard economic analysis practices employed by users of economic statistics and other national statistical organizations, such as the United States, the United Kingdom, Australia and New Zealand.

Some researchers and economists look at inflation through an annualized lens, meaning more recent price changes (usually monthly or quarterly) are used to extrapolate what the inflation rate would be if price change continued at that rate. This method cannot account for sudden events that may impact prices, which we have seen recently with global events such as the COVID-19 pandemic or other geospatial or climate-related events where supply and demand shift sharply.

Though annualized rates look at short-term price movements, they are not necessarily indicative of future trends and could in fact be misleading. Annualized inflation rates rely on data from the past, as they are based on price change that has already occurred, and are vulnerable to price volatility. For example, annualized price change based on the first two quarters of 2020 would have been drastically different from the price change Canadians actually experienced during the first year of the COVID-19 pandemic. An annualized CPI could still be calculated using available data in Table 18-10-0006-01 for organizations to calculate these trends.

Statistics Canada is committed to data accuracy, quality and timeliness in measuring price change and producing a CPI that reflects the experience of all Canadians. The agency publishes a rich set of tools and resources on the Consumer price index portal to shed light on consumer inflation and its impacts. Recent enhancements and developments in the Consumer Price Index Program (see Enhancements and Developments in the Consumer Price Index Program), such as the move to annual updates to the CPI basket of goods and services, the implementation of prices for used vehicles (see Measuring price change for used vehicles in the Canadian Consumer Price Index), incorporating scanner data and other alternative data sources, and the introduction of an adjusted price index during the COVID-19 pandemic (see Consumer expenditures during COVID-19: An exploratory analysis of the effects of changing consumption patterns on consumer price indexes) highlight the ongoing innovations and relevance of the CPI program.

Why did CPI-common show larger revisions in late 2022?

The CPI-common is a measure of core inflation that tracks common price changes across categories in the CPI basket. It uses a statistical procedure called a factor model to detect these common variations, which helps filter out price movements that might be caused by factors specific to certain components.

CPI-common is re-estimated each month, and revisions will occur due to changes in the model parameters with the addition of each new data point. In this case, the revisions are the result of the model picking up increased co-movement in the CPI, which has resulted in a re-factoring of the series that make up CPI-common. Essentially, this means that more CPI goods and services are moving in common, or that inflation is more broad-based now than it has been in the past. The upward revisions observed in the CPI-common indicate that price changes previously identified as sector-specific or transitory have persisted and become increasingly common across many sectors.

Links for further information:

• Examining recent revisions to CPI-common - Bank of Canada
• What’s happening to inflation and why it matters - Bank of Canada
• Consumer Price Index: The Bank of Canada's Preferred Measures of Core Inflation Methodology Document
• Bank of Canada's Preferred Measures of Core Inflation General Information Document

What about base-years effects?

A base-year effect refers to the impact that price movements from 12 months earlier have on the current month's headline consumer inflation. When a large downward price change in the base month stops influencing—or falls out of—the 12-month price movement, this has an upward effect on the headline CPI in the current month. Conversely, a large upward price change in the base month creates downward pressure on the current month's measure.

Want to know your own personal rate of inflation?

Did you know you can calculate your personal rate of inflation, or that of your household, based on the products and services you actually buy?

Please check out our Personal Inflation Calculator. It's a unique tool that allows individual Canadians to see how their personal experience of inflation compares to the CPI. It incorporates factors such as their unique purchasing patterns and prices in the regions where they live.