Waruna Wimalaratne, Amanda Wright, Gerry O'Donnell and Marc Prud'homme
Statistics Canada, Consumer Prices Division
Introduction
The CPI
CPI Classification
Representative Products
Overview of the 2009 Basket Update
Analysis of Basket Weights
Conclusion
Introduction
The Consumer Price Index (CPI) is one of Canada's most closely watched economic indicators. Its purpose is to measure the changing cost of a fixed basket of goods and services, typically purchased by Canadians.
As the economy evolves over time, so too must the CPI. With the June 2011 release of the May 2011 CPI, some noteworthy changes took effect: the weighting patterns were revised; the classification system updated; and various methodological changes initiated.
The CPI
The CPI is a weighted average of the price changes for a fixed basket of goods and services purchased by consumers. The weights, which are based on the expenditure patterns of consumers for a given year, play an important role in determining the impact of a given product's price change on the CPI. For the calculation of the CPI, the basket is set for a number of years.
Over time, consumers will modify their purchasing patterns for various reasons, such as rising (or declining) prices and the arrival of new products in the marketplace. For the CPI to be reflective of these changes, the basket is updated at 4-year intervals. Thus, the rapid rise of the basket share for internet service provision from 0.32% in 2001 to 0.70% in 2009, for example, reflected the growing importance of the internet in the daily life of Canadians. In 2009, fully 75.1% of Canadians accessed the internet from home at least once per day, up from 63.7% in just four years.1
With the latest update to the CPI basket, the expenditure weights, which were previously based on spending patterns from 2005, became reflective of those from 2009. The Survey of Household Spending (SHS) is the main source for this weight information.
Another aspect of the basket update exercise is the review and, if necessary, modification of the classification structure of the CPI. Through this exercise, the basket remains reflective of emerging new products in the marketplace, demographic changes and changes in income. With this latest revision, the structure of the basket was modified to better represent the growing popularity with consumers of newer digital devices. The basket also reflects the expanded coverage of the CPI into areas such as funeral services and legal services not related to the dwelling.
CPI Classification
The CPI classification is organized according to a top-down hierarchal structure (see figure below). At the top of the structure is the All-items CPI, below which are the 8 major components. The major components are particularly useful for analytical purposes, since they provide a valuable indication about the sources of monthly and annual inflation. At the lowest level of this classification system, there are 175 basic classes, which are the building blocks of the CPI.
Description of chart 1
Analysis of the 2011 Consumer Price Index Basket Update
The Consumer Price Index classification is organized according to a top-down hierarchal structure, depicted in a pyramid chart with four levels. At the first level, or the top of the pyramid, is the "All-items Consumer Price Index". Below at the second level of the pyramid are the eight major components which are:
- Food;
- Shelter;
- Household operations, furnishings and equipment;
- Clothing and footwear;
- Transportation;
- Health and personal care;
- Recreation, education and reading;
- Alcohol beverages and tobacco products.
At the third level of the pyramid there are "Intermediate level aggregations".
At the fourth and lowest level of the pyramid there are "175 basic classes", which are the building blocks of the Consumer Price Index
Representative Products
In a modern economy, there are millions of goods and services available to consumers. As it is clearly impractical to collect prices for all of them, a sample is drawn.
The basic class, which is the lowest level product class in the CPI classification, not only acts as the "building block" of the CPI, but also guides the statistician when designing the sample of products from which prices will be collected. A basic class will typically comprise one or more so-called representative products, which have been chosen because their price behavior is deemed a good approximation for that particular class of products.
Some basic classes are more narrowly defined than others. The basic class for apples, for example, is a narrow class comprised of different varieties of apples. In contrast, a basic class such as men's clothing will be comprised of a greater number of representative products, such as shirts, pants and suits. Another broadly defined basic class is video equipment, where the representative products are far more diverse. In this class, products such as flat panel televisions, DVD players, Blu-Ray players and video-game consoles were chosen to represent all purchases of video equipment.2
Typically, the selection of a representative product is based on the expertise and judgment of commodity specialists from Statistics Canada. To assist them in making their choices, the commodity specialists consult the various sources of information available to them. These include in-store visits, trade publications, consultations with market experts and data from outside sources, as well as from within Statistics Canada.
This information is then reviewed and analyzed to choose the most representative products for the basket. Factors such as the complexity of tracking an item's many features, collection costs, geographical reach and continuous availability will also play a role in the selection of items to be priced.
A general consideration when defining a representative product is that it must not be described too vaguely or too specifically. It must also be available for a reasonable period to accurately estimate its price change. Collection cost is also an important consideration, since the timing and location of price collection must be optimized.
Overview of the Basket Update
With the latest basket update, several new products were introduced into the CPI. Tablet computers and smartphones were added to a newly created class called multipurpose digital devices. Some food items, such as dried lentils, various breakfast cereals, and frozen strawberries, were added to the CPI to reflect the consumption of healthier foods by consumers. Fees for retail club memberships and the purchase and renewal of passports were also added, after internal research revealed that consumers were now spending an appreciable amount in these areas.
Analysis of Basket Weights
The table below shows the evolution from 1986 to 2009 of CPI basket weights for Canada, according to the 8 major components. During this period, the basket share of clothing fell the most, from 8.7% to 5.6%. Food also declined, dropping from 18.1% to 16.1%. The expenditure share for recreation, education and reading increased the most, from 8.8% to 11.8%. Throughout this period, the share of shelter costs remained relatively constant, accounting for over 25% of consumer budgets.
| Component | 1986 | 1992 | 1996 | 2001 | 2005 | 2009 |
|---|---|---|---|---|---|---|
| Food | 18.1 | 18.0 | 17.8 | 16.8 | 16.9 | 16.1 |
| Shelter | 25.7 | 27.6 | 27.1 | 26.3 | 25.7 | 27.5 |
| Household Operations, Furnishings and Equipment | 10.7 | 10.4 | 10.7 | 11.1 | 11.4 | 11.8 |
| Clothing and Footwear | 8.7 | 6.8 | 6.3 | 6.0 | 5.6 | 5.6 |
| Transportation | 18.3 | 17.2 | 18.6 | 19.4 | 19.6 | 19.3 |
| Health and Personal Care | 4.2 | 4.4 | 4.6 | 4.6 | 4.8 | 5.0 |
| Recreation, Education and Reading | 8.8 | 10.2 | 11.3 | 12.5 | 13.0 | 11.8 |
| Alcoholic Beverages and Tobacco Products | 5.6 | 5.5 | 3.5 | 3.3 | 3.1 | 3.0 |
Figures may not add to 100% due to rounding. Weights are expressed as proportions of All-items CPI in the weight reference period dollars.
Canadians allocated a much larger share of their budgets to consumer services in the last few decades. While the share of expenditures on goods declined from 55.2% to 47.7% from 1986 to 2009, the importance of services reached 52.3% over the same period.
Shifting basket shares tend to result from evolving social and economic factors. For example, the increasing importance of pre-cooked frozen food preparations (up from 0.14% in 1986 to 0.43% in 2009) is reflective of changing lifestyles, as Canadians showed a greater preference for quick meal solutions.
The noticeable drop in the weight for reading and other printed material, from 0.82% in 1986 to 0.46% in 2009, was in part due to the easy and widespread access to online digital media, which provided much of the same content at no cost to consumers.
The demand for high-tech goods increased markedly in the last two decades. The expenditure share of computer equipment and supplies, for instance, grew from 0.45% in 1992 to 0.72% in 2009.3
The aging Canadian population, among other factors, led to a rise in the importance of prescribed medicines in the CPI basket. The share of medicinal and pharmaceutical products in the basket grew from 0.45% in 1986 to 1.02% in 2009, as the proportion of the population aged 50 or older reached 33.7%, up from 24.3% in 1986.4
Conclusion
The Consumer Price Index is Canada's most important and well-known measure of inflation experienced by consumers. A basket update provides the ideal opportunity to review many of its underlying concepts and methods. As the Canadian economy continues to evolve, so too must the CPI. The current changes, as well as future ones, will ensure that the CPI will be a reliable indicator of inflation.
Notes
- Estimates based on the Canadian Internet Usage Survey, survey 4432, Statistics Canada. Table 358-0129 - Canadian Internet use survey, Internet use at home, by age group and frequency of use, CANSIM. The target population for the survey has changed from individuals 18 years of age and older in 2005 to individuals 16 years of age and older in 2007.
- Where possible, representative products are assigned weights to ensure their relative importance in the CPI accurately reflects consumer expenditures.
- The Quarterly Retail Commodity Survey similarly shows a 46.9% growth in sales of computer hardware and software from 1998 to 2009. Estimates based on the Quarterly Retail Commodity Survey, survey 2008, Statistics Canada. Table 080-0018 – Retail commodity survey based on the North American Industry Classification System (NAICS), CANSIM.
- Estimates based on the Population by Age and Sex for Canada, survey 3604, Statistics Canada. Table 051-0001 – Estimates of population, by age group and sex for July 1, Canada, provinces and territories, CANSIM.