What Is The Consumer Price Index?

What Is The Consumer Price Index?

Written by Matthew Taylor
Fact-checked by Caitlin Wood
Last Updated November 8, 2021

The Consumer Price Index (CPI) is a price measure that takes price changes for individual goods and services in a predefined basket of goods and averaging them. This basket consists of a wide variety of goods and services, such as gasoline and milk. Price changes are reported on a month-to-month basis, or the change in the price of a good or service over the previous month, and on an annual basis, or the change in the price of a good or service over the previous 12 months.

 It is important that Canadians are aware of the CPI and how it works because changes to the CPI affect their consumption habits.

How Does The Consumer Price Index Work?

The Consumer Price Index (CPI) works by examining the average price level of a predetermined basket of goods in a country’s economy to measure the purchasing power of its currency. It is measured on a month-to-month basis and an annual basis. The average price change of what’s in the basket of goods is the CPI. For example, if the CPI has increased in the previous 12 months, we can observe that it would cost more money to buy what’s in the basket than it did 12 months ago. This observation also means that our money can buy less than it could 12 months ago.   

How Does The CPI Affect Canadians?

The CPI affects all Canadians, whether it’s directly or indirectly. If someone earns or spends money, the CPI is relevant to them.

Many things are affected by the CPI. The amount paid out monthly for Old Age Security pensions, for example, is directly tied to the CPI. Other forms of social and welfare payments, such as Canada Pension Plan payments, are adjusted every so often to take into consideration changes in the CPI.

Contractual and price-setting arrangements are also often tied in some way to changes in the CPI. These arrangements include rental agreements and spousal and child support payments.

Cost-of-living adjustments in labour contracts tie wage increases to changes in the CPI. Many Canadians’ labour contracts include cost-of-living adjustments clauses.

CPI figures are reported to the Canadian public every month. Some people do not understand that these figures are not tied to their individual habits; rather, they are tied to the average change in retail prices of all consumers in Canada. The CPI is comprised of a basket of goods that contains a wide variety of goods and services, and since each consumer buys different goods and services, it is unlikely that anyone would buy everything in the basket at one point in time. The CPI basket of goods ensures a consistent list of goods and services to analyze rather than examining individual consumption and spending habits.

What Is In The CPI Shopping Basket?

While the CPI basket of goods consists of an extensive list of goods and services (about 700 individual items), it is broken down into eight major components. These components include:

  • Housing (Includes: rent and mortgage interest)
  • Household operations, furnishings and equipment (includes: furniture, internet and phone costs)
  • Food and non-alcoholic drinks
  • Transportation
  • Education and recreation (includes: digital media, newspapers, etc)
  • Medical and personal care 
  • Apparel and footwear
  • Alcohol, tobacco, and recreational cannabis

Learn about the minimum wage in Canada and how it’s different across every province.

What Is The Current CPI in Canada?

As mentioned, the CPI measures the change in prices Canadians pay for different goods and services. Over the last year, prices have increased significantly in almost every major category. The CPI inflated by 3.6% from May 2020 to May 2021. This year-over-year increase was the highest recorded since May 2011 where the CPI increased by 2.5%. 

In fact, according to Statistics Canada

  • Shelter prices rose 4.2% from May 2020 to May 2021, which was the largest annual increase since September of 2008. 
  • Durable good prices also increased by 4.4% from May 2020 to May 2021, which was the biggest annual change since 1989. 
  • Furniture prices increased by 9.8% from May 2020 to May 2021, which was the fastest growth rate since 1982. This price increase was driven by an increase in the price of upholstered furniture, which was 10.3% in May of 2021.
  • Beef prices fell 4.3% over the year from May 2020 to May 2021, mainly due to COVID-19 related supply chain issues. 

Year over Year Change In CPI For The Eight Major Categories

May 2020 – May 2021
Overall Consumer Price Index (CPI)3.6%
Food and non-alcoholic drinks1.5%
Household operations, furnishings, and equipment0.9%
Apparel and footwear3.9%
Medical and personal care3.1%
Education and recreation1.8%
Alcohol, tobacco, and recreational cannabis1.8%

Consumer Price Index Misconceptions 

As the Consumer Price Index is not commonly used by the average Canadian, there are several misconceptions around it that can make it difficult to understand. 

The CPI Is Not The Only Way To Measure The Rate Of Price Change

Some people think that the CPI is the only measure of the rate of price change. There are many measures of the rate of price change that are available to the public. These measures include the Raw Materials Price Indexes, the Farm Product Price Indexes, and the New Housing Price Indexes.

The CPI Is Not A Measure Of A Price Level Or A Product’s Actual Price 

Some Canadians confuse the CPI as a good or service’s price level or actual price. However, the CPI merely shows how the price of goods and services has changed over a period of time, usually over a year or month-to-month basis. The CPI basically shows the percentage by which a certain good or service has increased or decreased. 

The CPI Is A Cost Of Living Index

The CPI is not a cost-of-living index, since a cost-of-living index is different for every individual based on their tastes and consuming habits. It is impossible to measure such an index for an entire population, so the CPI relies on a fixed basket of goods instead.

Consumer Price Index FAQs

How are sales taxes and income taxes treated in the CPI?

While sales taxes are included in the CPI, meaning that changes in the CPI could result from changes in sales taxes, changes in income taxes are not included in the CPI.

How does the CPI determine what’s included in its Basket of Goods?

The CPI takes data from Statistics Canada’s Survey of Household Spending and from other sources to determine what’s included in the Basket of Goods based on consumer spending patterns.

What is the Consumer Price Index annual average?

The CPI annual average is an average of the monthly CPI values in a 12-month period.

Bottom Line

The CPI is a measure that examines the average price change in a predetermined basket of goods and services. It is measured both monthly and annually. The basket of goods is made of eight major components, including food and shelter. The CPI measures our currency’s purchasing power by examining the price level in our economy and how much we pay for goods and services. The higher the increase in the CPI, the less purchasing power our currency has because we can buy fewer things with it. Thankfully, as the CPI increases, the government-issued social payments are adjusted to accommodate the change. It is important that Canadians understand what the CPI is and how it works as it affects every Canadian that earns an income and spends money. 

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Matthew joined the Loans Canada writing team in 2021 while was finishing up a Bachelor's degree at the University of Saskatchewan. It was there that he discovered his love of writing. His work has appeared in several publications, including the Canadian Student Review and NewEngineer.com. In his spare time, Matthew enjoys reading, geocaching, and spending time with his family and pets.

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