CPI
The CPI either understates or overstates cost-of-living increases.
- known as the index number problem.
The CPI is supposed to represent the average Canadian household's spending habits. For this reason, a weighted average is used.
- ex. Canadians spend approximately 16% of their household budget on Food, (which further breaks down in other categories), 27% on Shelter, and 19% on Transportation, etc. This overall level of our spending is factored into the calculation of the CPI.
- This shows how it is inherent in the model of the CPI that we are talking about averages here. There is no single individual that exists that will pay exactly 5% more from last year if CPI is 5%. What results is a bell curve, and each individual may reside on either side of that average.
The CPI also breaks down how much weight each province is given in the calculation.
- ex. Ontario carries an expenditure share of 39.83%, which means that consumption in Ontario represents 39.83% of all household consumer spending in Canada
- ex. British Columbians contribute more to overall consumer spending than Yukoners, so the changing prices in B.C. will be given more consideration.
If the province's consumer expenditure on a particular commodity is negligible, then it may be withheld from the calculation
- ex. The average Albertan's yearly expenditure on fuel is so low that it isn't even included in their CPI calculation.
Base period
The CPI is arbitrarily set to equal 100 in the index base period.
- meaning all index values express price change in percentage terms in comparison to the index base period
- ex. if the index is 123.4, that means prices have increased 23.4% since the base period. As of 2021, the index base period of the CPI is 2002.