Consumer Price Index (CPI): How Does It Affect Me?

The Consumer Price Index (CPI) is an important measure to the Canadian economy. Whether it’s a price increase at your local grocery store, a rise in salary or a pension cost of living adjustment, the CPI affects millions of Canadians every day.

Most people use the terms CPI and inflation interchangeably – although both measure price changes over time, they are both different metrics. Let’s define the CPI, look at the difference between the CPI and inflation, and how it affects average Canadians.

Definition of the CPI

The Bank of Canada defines the CPI as “a measure that tracks movements over time in the level of consumer prices.” Simply put, the CPI measures the cost of living for the average Canadian. Statistics Canada tracks on a monthly-basis retail prices of around 600 goods and services an average Canadian family purchases. The goods and services measured include necessities like food, housing, transportation, furniture, clothing, and recreation.

Each month like clockwork Statistics Canada releases its Consumer Price Index Report. The report reads something like this “Consumer prices rose 1.2% in the 12 months to October, matching the increases in August and September.” Similar to housing statistics, the CPI is seasonally-adjusted. The CPI is reported on a nationally, provincially and municipal level.

You probably spend a lot more on food and shelter than haircuts and DVDs (hopefully!). To account for this, each item is given a different weighting base on the portion of disposal income it uses. Items like food and shelter have a higher weight – a price increase from these items will have a bigger impact on a family’s budget.

Calculating the CPI

Although the media typically only mentions increases in the CPI, it’s important to understand how the CPI is calculated. Current month prices are compared to a base year (currently 2002). The basket of goods and services for the base year is assigned a value of 100. Current prices are compared to the base year. For example in 2011 the average CPI was 119.9, meaning you’d have to pay $119.90 in 2011 for the same basket of goods and services that would have cost only $100 in 2002.

Core CPI

The Core CPI is a key measure used by the Bank of Canada to set monetary policy. Although the Core CPI is measured in the same way as the CPI, it excludes eight of the most price-sensitive items – fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products. This enables the Bank of Canada to obtain a clearer picture of the underlying trend of inflation.

The Bank of Canada has adopted and has maintained an inflation-control target in recent years. The target aims to keep the CPI at 2 per cent, in a band of 1 to 3 per cent. The Bank of Canada may consider raising its policy interest rate if the CPI goes above or below this target.

CPI vs. Inflation

Although similar, these two terms are not to be confused. While CPI and inflation both measure the rise over time in the cost of living and can reduce purchasing power, inflation is a broader measure since it includes all goods and services and doesn’t assign individual weightings to goods and services like the CPI.

Economists believe there are two main causes of inflation: demand-pull and cost-push. Demand-pull inflation is the classic example of demand and supply – if demand exceeds supply prices will increase. Cost-push inflation involves companies passing on cost increases (wage increases, higher taxation, increased input costs, etc.) to consumers in the form of price increases.

How does the CPI Affect Me?

Now it’s time to answer the million dollar question (pun intended). Besides price increases at your local grocer, the CPI is felt in many ways. Government benefits such CPP, GIS and OAS increase based on the CPI. CPP benefits are revised annually while the OAS is revised quarterly based on the current CPI. Although the CPI doesn’t include investments like stocks and bonds, the CPI can have an adverse impact on investment returns. You’ll have to achieve a long-term rate of return greater than the CPI to maintain your purchasing power. The CPI is used by employers to determine annual salaries increases for employees.

Many public sector pensions and a decreasing number of private sector pensions include inflation protection. Often referred to as a Cost of Living Adjustment (COLA), pension increases are typically based on the CPI. It’s a good idea to read the fine print in your pension plan booklet, as not all COLAs are equal. It’s important to know how often the COLAs take place (quarterly, yearly or ad-hoc), as well as what percentage of the CPI your pension will be increased by. For example, you may only receive 0.75% of the CPI increase – if the CPI increases 2% you’ll only receive a 1.5% pension increase. Also, some pensions only provide COLAs if the CPI increases above a set per cent, like 2%.

Do you monitor the CPI? How does the CPI affect your lifestyle?

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

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Sean Cooper

Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.
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Goldberg
8 years ago

lol. But how many ways can you say that CPI does not reflect reality? We get it now. That’s why nobody is arguing with you and you’ve made the last 14 post, unanswered. lol. But can we expect another “CPI analysis” from you right here, next month, and the next? Let me guess, that rate won’t be high enough to reflect reality as well…

All in good fun.

SST
8 years ago

Sorry you take offense to new information.
For those readers who are just ignorant enough not to know, CPI gets updated every month (not every 8 months) and is a perpetual “article”.

Have a great day!

Goldberg
8 years ago

You’ve had the last 14 posts on an article that’s 8 months old. Who are you talking to? lol

SST
8 years ago

At the grocers on the weekend to find canned tuna now costs $2 per can; a year ago it was $1 — a 100% increase in cost.

For those here in the upper-crust, canned tuna is well-known to be a low-income staple: cheap and high in protein.

The new Fed tariff act is the cause of this increase, but the Retail Council of Canada states “changes in tariff rates of up to 4 per cent for items such as canned tuna”…so what is comprising the other 96% of the price increase?

And the poor continue to get more poor.
(But at least hockey equipment is exempt from new tariffs!)

Wonder if the gov’t (or any entity) has ever taken up the task to formulate an economic-level CPI (eg. lower/middle/upper class) instead of the ignorant average with which we are currently saddled.

[Note: Empire Co. (EMP.TO) recently bought the dominant local grocer chain. Since that time, prices have risen and quality has dropped…so the above could just be company-centric.]

SST
8 years ago

Nice little +4.5% pop in West Coast gas prices this weekend.

If this is CPI-defined “deflation”, I don’t want any part of inflation!

SST
8 years ago

Excellent!

http://www.statcan.gc.ca/daily-quotidien/130621/longdesc-cg130621a004-eng.htm

Current average deflation in BC is now -0.7%! Woo hoo!

I wonder when I’ll be seeing a decrease of prices in wide range of products and services?

Gas? No.
Rent? No.
Taxes? LOL!
Food? No.
Utilities? No.

Hmmm….

SST
8 years ago

“Regionally, British Columbia and New Brunswick saw their inflation rate dip into negative territory.”
http://www.cbc.ca/news/business/story/2013/05/17/business-inflation-cpi.html

Uh-oh…deflation rears it’s ugly head! lol!

Funny that “negative” inflation, considering my property tax, food, utilities, fuel, and wage have all increased. Perhaps I just need to buy more travel tours and video equipment.

Good thing B.C. gas prices haven’t increased 10% over the last month. Guess the next CPI report will be a bit different. Or not.

SST
8 years ago

On my most recent bill the price of residential water increased 8% and the sewer rate increased 16%.

Lucky for me the CPI in British Columbia is almost 0%.

SST
8 years ago

As previously stated, taxes are NOT included in the out-of-touch CPI calculations.

Yet:
http://www.timescolonist.com/property-taxes-up-4-for-victoria-homeowners-1.114087

A 4% property tax increase when the official CPI is “a barely visible 0.1%”???

Gotta love the disconnect between government tentacles.

Are my roads 4% more paved and smooth? No.
Am I using 4% more utilities? No.
Did the police and fire forces increase 4%? No.
Am I producing 4% more garbage? No.
Has my house increased 4% in basic utility? No.
Has my lot size increased 4%? No.

The real reason — tax shift from business to individual.

SST
8 years ago

The more things change…

Motel 6

1962 a room cost $6.
2013 a room cost $50 (minimum).

Has the utility of a hotel room really increased 700+% in fifty years?