CPI and Inflation

What is CPI?Consumer Price Index

Measures rise & fall of prices of consumer goods and services

Examines average prices of g/s purchased by typical urban Canadian household

What goods do you believe would you believe are included?

What is CPI?Think of a or of

products

As the prices in the basket go up, so does CPI

Calculated monthly in 64 Canadian cities , with approximately 600 items in the basket or cart

Weights •Some items are given more importance – they are weighted•E.g. The cost of vs.

•A 10% rise in the cost of gasoline has more impact on our economy than a 10% rise in the cost of broccoli (cross category)

We can also examine weights within a category

Example: a 5% increase in the price of Farmers milk impacts us more than a 5% increase in the price of King Cole TeaPeople spend more, on average, on milkMilk is weighted at 0.69 and tea at 0.06

in the foods category

Weights

Weights 2002 Item Weight

•Shelter•Household Ops. & Furnishings

Total Shelter/Housing

26.62%11.1%

37.72%

Transportation 19.88%

Food 17.04%

Recreation/Education/Reading

12.02%

Clothing and Footwear 5.36%

Alcohol & Tobacco 3.07%

Health and Personal Care 4.73%

TOTAL 100.0%

Items in the Shopping CartEach category in the previous slide has dozens of individual g/s within

ACTIVITY - Get into pairs and come up with several g/s that could be included in each category

E.g. Food – flour, milk, meat, etc.

Income taxCharitable donationsPension contributionsConsumer savings and investments

Even though these are areas that many Canadians direct their hard earned income toward, they are seen as PERSONAL – there is no typical scenario

Items NOT in the Shopping Cart

Price CollectionPrices for shopping cart items are

collected monthly for most itemsQuarterly – haircuts, dry-cleaningAnnualy – property tax, tuition

The frequency of price changes for consumer g/s dictated the frequency of price collection

IndexingCPI is NOT measured in terms of dollars and centsIt examines how much the cost of g/s changes from

the BASE YEAR to the next (current base year is 1992!)

Example: Base year index is 100.0, the next year is 104.3. The index is 4.3% higher OR the cost of g/s in the shopping cart is 4.3% higher

This is an indicator of INFLATION – as CPI rises or falls, it indicates inflation may be rising or falling

COLA

Not True Cost of LivingCPI measures the prices of

CONSTANT g/s – they do not changeDoes not allow for the fact that

consumers adjust their spending habits (substitute goods, alternate goods) as prices rise or fall

Average representationQuality changes – CPI deals with pure

price changes, not product quality

CPI Affects…CPI affects three major areas of Canadian

economic well-being:1.OAS, CPP, Social Welfare Payments2.Rental agreements, spousal/child support,

other contractual and price-setting agreements

3.COLA – some clauses link wage increases to CPI Increase wages the same % as CPI

increase

Purchasing PowerAllows us to examine how far our dollar goes

compared to prior periodsExample: How much money in March of 2010 has

the same purchasing power as $2500 in 1986?

Index 1986: 104.92Index 2010: 149.64(149.64 104.92 ) X 2500 = $3565.67

What would happen if you did the inverse?