CPI and Inflation

What is CPI? Consumer Price Index Measures rise & fall of prices of consumer goods and services Examines average prices of g/s purchased by typical urban Canadian household What goods do you believe would you believe are included?

What is CPI? Think of a or of products As the prices in the basket go up, so does CPI Calculated monthly in 64 Canadian cities, with approximately 600 items in the basket or cart

Weights Some items are given more importance – they are weighted E.g. The cost of vs. A 10% rise in the cost of gasoline has more impact on our economy than a 10% rise in the cost of broccoli (cross category)

We can also examine weights within a category Example: a 5% increase in the price of Farmers milk impacts us more than a 5% increase in the price of King Cole Tea People spend more, on average, on milk Milk is weighted at 0.69 and tea at 0.06 in the foods category Weights

Weights 2002 ItemWeight Shelter Household Ops. & Furnishings Total Shelter/Housing 26.62% 11.1% 37.72% Transportation19.88% Food17.04% Recreation/Education/Reading12.02% Clothing and Footwear5.36% Alcohol & Tobacco3.07% Health and Personal Care4.73% TOTAL100.0%

Items in the Shopping Cart Each category in the previous slide has dozens of individual g/s within ACTIVITY - Get into pairs and come up with several g/s that could be included in each category E.g. Food – flour, milk, meat, etc.

Income tax Charitable donations Pension contributions Consumer savings and investments Even though these are areas that many Canadians direct their hard earned income toward, they are seen as PERSONAL – there is no typical scenario Items NOT in the Shopping Cart

Price Collection Prices for shopping cart items are collected monthly for most items  Quarterly – haircuts, dry-cleaning  Annualy – property tax, tuition The frequency of price changes for consumer g/s dictated the frequency of price collection

Indexing CPI is NOT measured in terms of dollars and cents It examines how much the cost of g/s changes from the BASE YEAR to the next (current base year is 1992!) Example: Base year index is 100.0, the next year is The index is 4.3% higher OR the cost of g/s in the shopping cart is 4.3% higher This is an indicator of INFLATION – as CPI rises or falls, it indicates inflation may be rising or falling COLA

Not True Cost of Living CPI measures the prices of CONSTANT g/s – they do not change Does not allow for the fact that consumers adjust their spending habits (substitute goods, alternate goods) as prices rise or fall Average representation Quality changes – CPI deals with pure price changes, not product quality

CPI Affects… CPI affects three major areas of Canadian economic well-being: 1. OAS, CPP, Social Welfare Payments 2. Rental agreements, spousal/child support, other contractual and price-setting agreements 3. COLA – some clauses link wage increases to CPI  Increase wages the same % as CPI increase

Purchasing Power Allows us to examine how far our dollar goes compared to prior periods Example: How much money in March of 2010 has the same purchasing power as $2500 in 1986? Index 1986: Index 2010: (  ) X 2500 = $ What would happen if you did the inverse?