The CPI: How Economists Track Price Changes in Canada

The Consumer Price Index (CPI) has long been a central tool for measuring inflation and price levels in Canada. But in a rather volatile post-pandemic economy, is this indicator still reliable?

The answer is yes... most of the time. But before going any further, let’s take a step back: what is the CPI?

It is a statistical measure calculated monthly by Statistics Canada that tracks the price variations of a fixed basket of goods. Although the CPI is often called the “grocery basket index,” the expenses it covers go beyond food and include housing, clothing, transportation, health, and recreation. The goal is to reflect the cost of living and measure inflation, that is, the general increase in prices over a given period.

The CPI remains a reliable tool because it has been compiled systematically and rigorously for decades. Its database allows specialists to identify comparable and plausible trends in price changes across the country. This predictability enables policymakers to adjust monetary policies, such as interest rates, and index various benefits and wages, ensuring that these adjustments reflect changes in the cost of living.

However, despite its advantages, the CPI is not a perfect index.

Since its calculation is based on a fixed basket of goods and services, updated periodically, it is not flexible enough to account for the actual consumption habits of Canadians. In this sense, the CPI is slow to reflect current trends and new service offerings, particularly digital ones.

The statistic also cannot predict the substitution effect, which some specialists perceive as a bias of the tool. Since its “basket” is fixed, the index cannot account for consumer choices when faced with a price increase on a given product or good.

The vastness of Canada and the significant disparity between rural and urban areas, the Maritimes, the central, and the western regions also complicate the interpretation of the CPI.

Considering these limitations, experts now use complementary tools to the CPI to enhance their understanding of the Canadian economy. The Producer Price Index (PPI), the GDP deflator, and regional indicators are among the statistical means used to refine the accessible data on price changes in the country.

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