Statistics Canada has overhauled the basket of goods and services that it uses to measure inflation, reflecting the extent to which the pandemic and lockdowns have shifted Canadians’ spending habits.
Among the new entries on the list of roughly 700 items that comprise the Consumer Price Index (CPI) basket are video-game consoles and delivery fees, symbols of a year spent hunkered down at home, as Canadians sought to escape boredom on their screens and by ordering stuff online.
Diminished in importance are contact lenses, hair-care products, and perfume, items that now make up such a small percentage of the typical household’s purchases that Statistics Canada decided to stop publishing changes in their prices, said Heidi Ertl, a director at the federal agency.
Canadians aren’t necessarily buying less of those things; rather, they are spending a greater percentage of their budgets on other goods and services. The biggest shifts occurred in spending related to housing, which now represents nearly a third of the CPI basket, and alcohol, cigarettes and cannabis, which now account for a bigger share of household budgets than clothing and footwear.
“Normally these changes occur slowly over time and they’re the result of various changes (such as) demographics and consumer habits, but with the pandemic, things shifted very, very swiftly,” Ertl said of the CPI basket, adding that COVID-19 accelerated prompted the agency to accelerate plans to adjust its approach to measuring inflation.
The CPI might be the most important number that Statistics Canada generates. The Bank of Canada relies on it to set interest rates, governments use it to determine benefits, and companies and unions lean on it when negotiating wages.
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A reworking of the basket could bolster confidence in a number that some say has little relationship with everyday life. The Bank of Canada encountered significant doubt about the CPI when conducting survey research in 2020, a worry because skepticism about the way officials measure inflation could dent confidence in the central bank’s ability to keep inflation under control.
The CPI was already getting stale ahead of the pandemic, as it was based on what Canadians were buying in 2017. The unique economic circumstances of the past year only exaggerated the need for an update, as the line items of Canadians’ shifted dramatically in real time. The transportation component, for example, made up nearly a fifth of the basket pre-COVID but now comprises only 15 per cent of it. That’s because stay-at-home orders and travel nixed the need for vacations and commutes.
Now that Canada’s vaccination rates are among the highest in the world, normal activities are expected to resume over the summer, including travel. That means a CPI based on 2020 spending patterns could quickly become inaccurate if Canadian switch back to previous habits. But Statistics Canada has a plan for that. Last year, the agency began releasing an adjusted version of the inflation numbers to better reflect current spending, as the weights used for the official CPI remain fixed between official reassessments. Statistics Canada will continue to publish the adjusted measure for reference, Ertl said.
“Consumption patterns are likely to continue to evolve as we are beginning our recovery period, so that’s why the adjusted price index will continue to be used, as well as the official CPI, to play a key role in measuring the highly fluid economy,” she said.
Meanwhile, the CPI will now better mimic the surge in housing activity that occurred during the pandemic. The weight assigned to the shelter segment of the basket grew to 30 per cent from from 27 per cent in 2017. The weight for mortgage interest increased to 3.68 per cent from 3.3 per cent.
“While interest rates fell at the onset of the pandemic and remained at record-low levels for the rest of the year, consumers directed a greater share of their expenditures to mortgage interest due to rising home prices and the increased number of new mortgages,” Statistics Canada said in a report on the reassessment.
Though major markets are showing signs of cooling off following a spring of frenzied activity, Ertl pointed out that the agency treats houses as assets, so real-estate values don’t influence the CPI directly. Instead, Statistics Canada calculates the costs associated with owning a home, such as mortgage insurance and what a household would have to pay to replace its current dwelling.
Because Canadians dedicated more time to home refurnishing and improvements, the weighting for that section of the basket grew from 3.6 per cent to more than five per cent. As well, they spent more on alcohol, cigarettes and cannabis, which warranted re-weighting of that category from just over three per cent to close to five per cent.
The new CPI basket will come into effect with the release of June inflation data on July 28 and the agency will now reassess weightings annually to provide more accurate pictures of the price pressures Canadians face.
Correction: an earlier version of this story incorrectly stated that contact lenses, hair-care products, and perfume had been dropped from the CPI basket. Those items remain part of the CPI calculation, but Statistics Canada will no longer publish data on them because they no longer represent a significant percentage of household purchases.
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