CPI – Consumer Price Index - Transcript
CPI – Consumer Price Index
The Consumer Price Index (CPI) measures the rate at which prices of goods and services purchased by Canadian consumers change, on average, over a specified period of time.
Slide 2 – What is the CPI?
The measurement of the CPI is based on the cost of a fixed basket of consumer goods and services of constant quality and similar characteristics, where the commodities in the basket are selected to be representative of the household's expenditure during a specified period. The representation of the household's expenditure is called the CPI basket weights.
The Canadian CPI is published monthly and measures price change by comparing the cost of a fixed basket of consumer goods and services over time. Since the basket contains products of unchanging and equivalent quantity and quality, the index reflects only "pure" price change.
Slide 3 – What is the CPI?
The amount of money necessary to acquire this "fixed shopping basket" is referred to as the cost of the basket. Consequently, as prices of individual commodities change, the total cost of the basket will also change. The CPI, therefore, measures the price change of the total cost of the representative basket over a specified period of time.
The CPI, however, will not be affected if the typical household spends more by purchasing a larger quantity of the commodities, since the quantity of each commodity in the basket is fixed over time.
Slide 4 – What is the CPI?
The CPI constitutes a convenient and consistent way of measuring price changes across a variety of commodities.
By convention, the cost of the basket is transformed into an index. If 2015 is the reference period, the CPI for that year is given a value of 100.
The consumer price index in other periods is expressed as a percentage change in price relative to the value for the base period. For example, if the price of the basket has increased by 2.5% since the base year, the index is 102.5; if it has increased by 4.6%, the index is 104.6.
Slide 5 – CPI Basket Weights
The composition of the CPI basket is based on the pattern of household expenditure in the "weighting base period." Information on the spending habits of Canadian households is obtained primarily from the Survey of Household Spending (SHS), conducted by Statistics Canada.
The detailed information available from the SHS constitutes the starting point for selecting the basket of goods and services to be priced in the CPI. While the expenditure classes are adequate for tracking spending patterns of Canadian households, they need to be subdivided into as fine a level of commodity detail as possible with information from other sources such as independent industry data.
The CPI can best be understood from a top-down approach.
At the top is the total expenditure or pool of items purchased (known as the "all-items" level). This is progressively divided into finer commodity groupings.
Eight major components:
- Food – 16.23.
- Shelter 27.15 – rent, mortgage, property tax, electricity.
- Household operations, furnishings and equipment 12.97 – telephone, childcare, financial services,
- Clothing and footwear – 5.44.
- Transportation 19.7 – passenger vehicles, gas, drivers licence, air transportation, parking.
- Health and personal care 5 – prescribed medicines, dental and eye care, toiletry, haircut.
- Recreation, education and reading 10.89 – travel accommodation, tuition, home entertainment, sports.
- Alcoholic beverages and tobacco products 2.63.
Slide 6 – CPI Basket Weights
Each major component is divided into subgroups. For example, shelter is divided into three subgroups: rented accommodation, owned accommodation, water, fuel and electricity.
Each subgroup is further divided into more homogenous expenditure groups. For example, rented accommodation is made of rent, tenants' insurance and tenants' maintenance, repairs and other expenses.
To obtain more detailed information related to the CPI basket of goods and services and how it changed over time, refer to the real-time data table 18-10-0007-01 (formerly CANSIM 326-0031).
Slide 7– CPI Basket Weights
The CPI tracks the price change of goods and services for all consumers across the country.
The index does not to reflect your own consumer experience. Consumption is shaped by income, tastes and personal preferences, and the 35.2 million people who make up Canada's population do not have the same preferences, tastes and income.
The CPI is an average measure of price change. So, it takes into account the overall picture of consumer spending across Canada, including both items that you may buy frequently and others than you have no use for.
This overall picture of consumption spending may not match with your personal experience. However, the CPI has to measure all price changes in order to draw an accurate picture of inflation in the country, across its entire population.
Slide 8 – How is the CPI measured?
Prices are collected for each specified item in a representative sample of outlets, in terms of geographic area and of type of outlet, across Canada.
On average, over 90,000 price observations are collected each month by roughly 100 field interviewers collecting prices in the field in 5,000 outlets across Canada. In some cases, prices are collected at the head office in Ottawa via the internet or from administrative data.
In reaching decisions about precisely which items to include in price samples, statisticians need to balance the cost of data collection and processing against the accuracy of the index. Factors taken into account include the relative significance of individual items, and the extent to which different items are likely to exhibit similar price behaviour.
The next step is to determine the outlet types from which prices will be collected. In order to accurately reflect changes in prices paid by households for a given commodity, the sample outlets must be representative of where consumers make their purchase of each type of item.
The prices used in the CPI are those that any consumer would have to pay to purchase the specified goods or service. Any taxes on goods or services are included in the CPI price. Sale prices and "specials" are reflected in the CPI.
Slide 9 – How is the CPI measured?
The CPI aims to measure price changes for a fixed basket of goods and services over time. Therefore, the price of identical or equivalent items must be collected in successive periods.
However, in reality, the quality of goods is continually changing as new models and varieties replace earlier ones.
Changes are particularly important in markets for which the rate of technological progress is high or where consumer tastes change rapidly. As a result, price adjustments have to be made in order to eliminate the effects of a quality change on the price variation, so that the CPI measures "pure" price change. To adjust for quality change, a range of techniques are used to relate the prices of goods to their features.
A common technique is to determine which feature(s) of a product cause(s) the quality to change. To compare the prices of the older and newer models, however, products must first be put on an equal footing. The estimated value of the new feature is therefore added to the price of the older model.
Once price quotations are gathered, they undergo a careful screening to ensure that they meet the requirement of a matched sample for the purpose of the CPI calculations. In a matched sample, items that are priced from period to period must be identical in all respects. As a result, individual item prices are compared with prices collected in the previous period to ensure their equivalence and their accuracy, and to verify any large movements.
Slide 10 – Interpreting the CPI figures
Index numbers are always published to a reference base of 100. Index numbers and percentage changes are always published to one decimal place, with the percentage changes being calculated from the rounded index numbers. Index numbers for periods longer than one month are calculated as the simple arithmetic average of the relevant rounded monthly index numbers.
Movements in the CPI from one period to any other period can be expressed as percentage changes. The following example illustrates these calculations for the All-items CPI from February 2017 to February 2018. The same procedure is applicable for any two periods.
Percentage change allows comparisons in movements that are independent of the level of the index. For example, a change of two index points when the index number is 120 is equivalent to a percentage change of 1.7%. However, if the index number were 80, a change of two index points would be equivalent to a percentage change of 2.5%—a significantly different rate of price change.
The CPI generally uses three measures of percentage change:
- The twelve-month percentage change calculates the difference in percentage between the price index of a given month in a given year and the price index of the same month of the previous year;
- The month-to-month percentage change calculates the difference in percentage between the price index of a given month in a given year and the price index of the previous month of the same year; and
- The annual percentage change calculates the change between the average of indexes of a given calendar year and the average of indexes of the previous calendar year.
Slide 11 – What are the uses of the CPI?
Even though there are many measures of inflation, the Canadian CPI is often directly associated with the more generic concept of Canadian inflation. The Canadian CPI is the most frequently quoted measure of inflation.
The CPI is widely used:
- In setting and evaluating economic policies. The Bank of Canada uses the CPI and special aggregates of the CPI as a proxy for inflation to define its monetary policy, and to monitor the inflation control target. The CPI and its component indexes are also used by the government, analysts, business executives, labour leaders and other private citizens as a guide in making economic decisions and in assessing public policy impacts.
- As a tool to deflate current-dollar estimates. The CPI and its components are used to adjust economic estimates for price changes in order to obtain inflation-free estimates.
- In economic policy making and in private contracts in order to maintain purchasing power of monetary transfer through time. Millions of workers are covered by collective bargaining agreements that tie wages to the CPI or its derivate (cost of living adjustment (COLA) clauses). As well, the income of Employment Insurance beneficiaries, military personnel, senior citizens who receive Old Age Security, Canada Pension Plan / Québec Pension Plan beneficiaries, and those receiving social assistance is linked to changes in the CPI. In addition, some private firms and individuals use the CPI to keep rents, royalties, alimony payments and child support payments in line with changing prices.
- Finally, the CPI is also used by the provincial and federal governments to make adjustments to the income tax structure to prevent inflation-induced increases in taxes.
Slide 12 – The Canadian CPI
The CPI has a long standing history that began with a study conducted by the Department of Labour in the early 1900s. The study was based on a hypothetical family budget that represented the weekly expenditures of an urban working-class family of five. Retail prices of 29 food items and 5 fuel and lighting items were collected in approximately 60 cities.
CPI figures are produced monthly by Statistics Canada and are typically released within three weeks after the end of every month. Key CPI results are released in Statistics Canada's news release, The Daily, while detailed data on the CPI are available by consulting the real-time CANSIM tables' document.
The composition of the CPI basket is based on the pattern of household expenditure during a specific year, which is called the "basket reference period." The composition of the CPI is updated every two years. Updating the weights is an integral part of the CPI quality assurance process. An important objective of these basket updates is to bring item weights up to date in order to reflect changes in the range of available goods and services and changes in household spending patterns.
Basket updates also provide an opportunity to reassess the scope and coverage of the index and other methodological issues. Over time, Internet prices have been introduced in order to follow the changes in consumption behaviours, and scanner data (transaction data recorded as the cash registry) have been used in the CPI monthly calculation.
That concludes today's lecture on the Canadian Consumer Price Index. Thank you for watching. For more information, contact the Statistics Canada Training Institute at: email@example.com.