100 years of measuring consumer price changes
In Canada, we have been assessing inflation for more than a century. In 1910 the Ministry of Labor (now part of Employment and Social Development Canada) started publishing average retail prices for a basket of essential household items. The basket contained 29 groceries, five types of household fuels, rent – and even laundry starch.
The Canadians had good reason to have a way to track the price changes of the goods and services they used on a daily basis, since prices could and did change quickly. In 1917 the annual price change was a staggering + 17.9%, and in the four years of World War I the cost of living nearly doubled as inflation rose 48.3%. Disagreements between workers and companies about adjusting wages to reflect changes in the cost of living were also a major cause of industrial unrest.
Today, inflation in Canada is measured using the Consumer Price Index (CPI), which measures the increases and decreases in costs of a “representative” basket of goods and services of more than 700 items. By tracking Canadians’ actual monthly spending, the CPI measures changes in the prices of goods and services, not fluctuations in the cost of maintaining a particular standard of living.
To generate the CPI, Statistics Canada researchers fill a virtual shopping cart each month, add the total costs, and determine the total price changes from the previous month. Calculating the inflation rate is simple: if the basket of goods and services costs $ 100 one year and the same basket costs $ 102 the following year, the inflation rate is 2%. You can see the changes in the rate of inflation since 1914 using the Bank of Canada Inflation calculator.
Today the CPI basket consists of nine main components: food, shelter, transportation, household expenses, furniture and appliances, clothing, medical and personal care and two “catch-all” categories “sport, travel, education and leisure” and “alcohol, Tobacco and Recreational Cannabis. ”Statistics Canada has compiled a CPI visualization tool this shows how the components are made up and how prices are changing at both national and regional level.
The items in the shopping cart are regularly checked and adjusted to reflect the actual purchases made by Canadians. For example, during World War II households could no longer buy car tires, silk stockings or bananas, so they were removed from the shopping cart (to be replaced when they became available again); Firewood was removed in 1940 as more modern methods of domestic heating had prevailed; and in 2017, Rental of videotapes got the heave-ho.
In addition to taking price changes into account, all items in the shopping cart are “weighted” according to how much of the budget of a typical household is allocated to this item. This means that price increases for items that do not make up a very large proportion of household expenses, such as haircuts or lottery tickets, have less of an impact on the index than price increases for items that make up a greater proportion of household expenses, such as groceries or transportation.
The many uses of the modern consumer price index
The CPI “is a simple and well-known measure for price changes”, according to the Bank of Canada. Employers use it to make cost of living adjustments in wages and salaries, and governments use it to regulate income taxes and benefits like the Canadian retirement plan and retirement benefits.