Inflation is defined as the change in the level of prices. Most of the
time, people mean the "Consumer Price Index" or "CPI" when
they discuss inflation in a country. This is the change in the price "shopping
basket" of consumer goods for a country that the national statistics agency
has sampled over time on a monthly basis. The "core CPI" is the change
in prices without the food and energy components, or "ex food and energy".
Since food and energy prices are volatile, the "core CPI" is thought
to be a more accurate measure of underlying inflation.
The main challange in measuring inflation as the change in level of prices
is establishing which prices to use for the calculation. National statistics
agencies usually measure various inflation rates:
- the "raw materials price index" (RPI), or so-called "crude
goods" price index, which measures commodity price inflation;
- the "industrial product price index" (IPPI), which measures
changes in the wholesale price of goods at 'the factory door'; and
- the "consumer price index" (CPI), which measures the change in
retail prices.
Since economists, market strategists, and politicians are usually concerned
with changes in consumer prices, the CPI is the most frequently used measure of
price change. Across a country, however, prices vary with market conditions,
availability, transportation costs and other factors.
For example, the price of unleaded gasoline varies across Canada by a
significant amount. This reflects the transportation costs involved, the supply
of gasoline in each region, and most importantly the gasoline sales taxes in
each province since these vary considerably by province. To properly measure
these differences, Statistics Canada measures the CPI in each major urban centre
and forms a sample by province and territory. It then combines them on a
weighted basis to create the national Canadian CPI index. It is not unusual to
have major differences, as much as 1-2%, in the CPI between different provinces
and cities. This means where you live has a major impact on whether the CPI is a
proper measure of your inflation.
Another issue is the appropriateness of the sample of goods and services
which form the "basket of goods" for the CPI to consumers. Statistics
Canada actually samples prices by having "shoppers" visit retail
stores on a monthly basis and price consumer goods and services. The basket of
goods is selected and weighted according to a specific year, and updated only
over longer time periods.
The Canadian CPI was based on a 1980 sample of goods and not updated until
1995. This meant that the buying patterns of consumers in 1994 were assumed to
be those from 1980. The rapid changes in our society meant that some goods
important to 1994 consumers were not counted appropriately in the CPI because of
its 1980 weightings. Some goods and services commonly used by consumers in 1994
had not even been thought of in 1980. Examples of this would be the home
computer, automobile air bags and many consumer electronics.
Another issue is how relevant the basket is to the so-called average
consumer. If your children only will wear expensive "brand name"
running shoes, your price level change has been quite high. If they wear generic
shoes, the CPI has probably reflected your price level change accurately.
Changing buying patterns can impact the CPI. Consumers have now taken to
Sport Utility Vehicles, trucks and Mini Vans. This can been seen in the car
industry sales figures, which have shifted considerably to the truck category at
the expense of car sales. The CPI still reflects the "oil shock"
preference for smaller, economical cars which have not been selling well
recently.
All factors considered, the CPI in most modern industrial countries is
thought to be a fairly accurate reflection of the change in the retail price
level. This is important since CPI is used to index government pensions and
benefits, as well as tax brackets. The CPI is also used to convert the nominal
national accounting statistics, such as "Gross National Product" to a "real"
or after-inflation basis. With the issuing of inflation-linked
bonds, CPI has also been used to calculate the principal increase for this "real"
bond. |
