The Consumer Price Index (CPI) is usually considered a measure of the cost of living. It is one of major economic indicators and a tool to calculate inflation.
What is the CPI?
CPI is a monthly (somtimes quarterly) measurement of changes in consumer prices. In Canada, the CPI is based on the retail prices of a list of approximately 300 goods and services, from housing to food. Items in the consumer price index are weighted to reflect typical spending patterns, as it can be used to index (i.e., adjust for the effect of inflation) the real value of wages and salaries, to regulate prices, to deflate monetary magnitudes, to show changes in real values, and more. CPIs are presented as an index compared to the base year (usually 2005). This reference base year may be arbitrarily chosen and does not necessarily reflect the year to which underlying weights relate. CPI is one of several price indices that is calculated by most national statistical agencies.
The Consumer Price Index itemizes shares or expenditure weights (considering each good or service as an item in a consumer basket). It can ensure that a 10% price increase in rent, for example, would have a greater impact on the CPI than a 10% increase in the price of butter. CPI is then the sum of item prices multiplied by their weight.
Inflation as the derivative of CPI
Inflation is a rise in the general price of goods and services over a period of time. It is calculated as the annualized percentage change in a CPI. There is a widespread opinion that high inflation causes economic trouble. In fact, though, it has various effects, some of which are positive. Negative effects include a decrease in the real value of money and other monetary items, and high inflation may lead to shortages of goods. Meanwhile, as the inflations rises, central banks can adjust nominal interest rates in order to manage inflation and slow economic growth. Higher interest rates make the domestic currency more attractive to foreign investors. CPI rarely decreases: during the recession, it fell for the first time since 1955 in the United States. It is called deflation when the annual inflation rate falls below 0%.
CPI in Canada
The Canadian Consumer Price Index is published by Statistics Canada on a monthly basis. It is obtained by comparing the cost of a fixed basket of commodities purchased by consumers through time. Since the basket contains commodities of unchanging or equivalent quantity and quality, the index reflects only pure price movements. There are about 600 commodities specified to represent the price movement in 168 basic commodity classes. Over 90% of the price quotes used in the construction of the CPI are collected by personal visits to selected retail outlets. The biggest factor in measuring Canadian CPI is transportation, which accounts for 19.88%, and household operations, furnishings and equipment, which accounts for about 11%. Over the years, CPI is growing in Canada, but Canada’s is still one of the lowest CPIs among OECD countries. In 2010, Canada ranked eighth in a list of lowest CPIs, with 108,9 CPI in 2005.
Canadian provinces and territories by CPI
According to data released by Statistics Canada, Alberta has the highest CPI of all provinces and territories, followed Prince Edward Island and Nova Scotia. However, the relative importance of Alberta is only 11.43%. Ontario and Quebec have the strongest influence on the CPI. The importance is influenced by the basket of items used to calculate total CPI. Total Canadian CPI in February 2011 was 118.1, much lower than in Alberta, which had 124.2 CPI. According to Alberta Finance, several factors have contributed to the high level of Alberta’s CPI inflation, including increases in energy prices (natural gas in particular), automobile insurance premiums, and tobacco products.
Excluding gasoline, the Consumer Price Index rose by 1.6% in the 12 months leading up to February 2011, compared with a 1.8% increase in January, according to a report published by Statistics Canada. Consumer prices rose by 2.2% since last February, following the 2.3% increase posted in January. Energy prices rose 10.6% during the same period and gasoline prices continued to increase, rising by 15.7%. The main upward contributors to the annual change in the CPI are gasoline and electricity, while the main downward contributors are traveler accommodation, travel tours, and mortgage interest rates. CPI is expected to follow its growing trend.