The Bank of Canada defines inflation as “a persistent rise in the average level of prices over time.” The government-provided inflation metric is called the consumer price index, or CPI. But how is this CPI rate calculated? A simple average of prices in Canada wouldn't accurately represent how the average Canadian spends their money, or how their purchasing power is increasing or decreasing.
How CPI is calculated
The national agency responsible for calculating CPI is Statistics Canada. StatCan measures inflation by recording price changes in a curated selection of consumer goods and services. This basket of goods and services is currently divided into eight major components:
Household operations, furnishings, and equipment
Clothing and footwear
Health and personal care
Recreation, education, and reading
Alcoholic beverages, tobacco products, and recreational cannabis
On its website, StatCan provides a detailed list of all the product types it tracks in these categories. But the categories, and the items within, are weighted differently. For example, Canadians spend a much higher percentage of their earnings on rent than on milk. Because of this, a 5 per cent increase in rent prices will have a larger impact on StatCan’s CPI than a 5 per cent increase in the price of milk.
How does 'shrinkflation' work?
StatCan not only measures the price of a product but also its size. Companies sometimes try to keep prices the same through “shrinkflation” — cutting costs by providing less product without lowering prices. For example, the price of a jar of peanut butter may not have changed, but the jar is 10 per cent smaller than before.
Shrinkflation can often be harder for the consumer to notice than price changes. Therefore, StatCan includes product quantities when calculating CPI. Some examples of things StatCan monitors to include product quantities in CPI calculations are the number of ply in tissue and the package size of juice boxes.
Does CPI include taxes?
StatCan includes a number of taxes consumers pay when they purchase a product. This includes the Goods and Services Tax, provincial retail sales tax, and tobacco and liquor taxes. A change in these taxes would therefore affect CPI. Personal income tax, on the other hand, is not included.
Once all the data have been collected, StatCan calculates CPI through a robust statistical process every month. This process takes over a hundred people to complete.
In the past, StatCan sent interviewers into stores to physically record prices for CPI. Now, the system has been modernized and most information is gathered through virtual means with some stores sending cashier data directly to StatCan.
The contents of the StatCan basket of goods and services and how much each category affects CPI get updated every two years. For example, cannabis products were added to the basket of goods in 2017 after the legalization of cannabis in Canada. The basket's purpose is to measure the purchasing power of an average Canadian, so StatCan carefully adjusts how much each category affects CPI based on current trends.
StatCan provides its CPI data on its website through an interactive tool called the personal inflation calculator. Canadians can use it to see how inflation affects them based on location and spending habits.