CPI: Why tinkering with Canada’s inflation measurement could trigger lower pay and pension increases

This article was published by the Toronto Star on February 13th 2012.  To see this article and other related articles on the Toronto Star website, please click here.

It’s not easy calculating inflation. How do you compare the price of computers from one year to the next?

What about that ketchup bottle now sold in 1-litre plastic bottles instead of 500 ml glass containers?

What about those high definition TVs that keep plunging in price. Or that when beef rises, consumers switch to lower cost meats instead.

There are myriad ways data gathering agencies like Statistics Canada can overestimate how much inflation is rising.

Yet, the Consumer Price Index is one of the most closely watched figures the agency produces each month.

Both government and employers use it to determine how much to increase pension benefits and wages.

If inflation rose 2 per cent last year, chances are you’ll get a 2 per cent cost living increase.

But what if Statistics Canada got better at more accurately gauging what we’re actually paying for things? What if that meant the reported rate of inflation was just 1.8 per cent, or even lower?

Governments and employers would be happy. They’d save millions in annual pension and pay hikes. But consumers would end up with less in their pockets.

“Changing the CPI like that will further disadvantage those dependent on government support programs. These already fall behind the standard of living,” Susan Eng, vice-president, advocacy, for the Canadian Association of Retired Persons (CARP) wrote in an email.

Eng was in Ottawa fighting the Harper government’s plans to raise the eligibility age for Old Age Security benefits from the current 65 years to age 67.

In fact, Canada’s official measure of inflation is undergoing a major $45 million, five year overhaul in a bid to make it more timely, relevant and accurate.

Statistics Canada’s current method of calculating inflation is based on a fixed basket of 600 goods and services. The basket is revised once every four years.

The method contains a number of “measurement biases,” according to the Bank of Canada, whose trend-setting interest rate is aimed at maintaining the rate of inflation within a 2 percentage point range.

The method fails to take into account things like the introduction of new products, the arrival of new discount retailers, and changes in consumer behaviour, the central bank says on its website.

For example:

When the price of beef rises, consumers switch to lower alternatives such as chicken.

New products, such as high definition TVs fall in price over time but may not even be in the basket.

Products, such as computers, improve over time. Consumers can buy more computer power for less money, for example. Making accurate comparisons over time can be complicated.

New discount retailers may enter the market between updates offering more competitive prices.

The Bank of Canada estimates Statistics Canada could be overstating the rate of inflation by as much as 0.6 per cent. Statistics Canada says it’s closer to 0.2 per cent.

In other words, Statistics Canada could be reporting inflation is rising at the rate of 2 per cent a year, while the average consumer’s daily expenses are actually rising as little as 1.4 to 1.8 per cent.

The revision could add up to big savings for government and employers and mean smaller pension and pay hikes for Canadians.

Some economists argue Canadians have been getting a free ride at the expense of government and corporations.

Others say the federal agency is simply doing what its counterparts in places like France and Sweden have already done.

The project will produce its first major result in 2013 when Statistics Canada will start updating the basket every two years, said Richard Evans, director of the consumer prices division for Statistics Canada.

The federal agency eventually plans to expand and update its sample size and adjust the relative weight of the items in the basket.

“The Consumer Price Index does overstate inflation and I believe that Statistics Canada is honestly trying to improve this measure. However, the timing of this initiative likely reflects the Harper government’s current focus on constraining indexed social benefits,” said Erin Weir, economist with the United Steelworkers Canada.

The problem is not unique to Canada. In the U.S., inflation is thought to be overstated by as much as 1 percentage point.

In Canada, wage increases were trailing inflation in November, the latest month for which both data were available. Average weekly earnings of non-farm payroll employees were up 2.2 per cent over the previous year while inflation was up 2.9 per cent, driven largely by gasoline price increases. In December, inflation slowed to 2.3 per cent.

Statistics Canada launched the multi-year CPI Enhancement Initiative in 2010.

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