The concept
A spatial consumer price index is a number which measures the cost of an identical market basket of consumer goods and services at a location (comparison location) relative to another location (reference location) at a given point of time. Spatial price indexes are based on matched prices of identical or similar products between a comparison and reference locations. Comparing like-for-like products ensures that price differentials between the locations are due to pure price differences and not owing to the attributes of a product such as brand name, size or quantity. Hence, the following relationship describes how spatial price index is calculated.
Spatial price index for location A = Cost of basket at location A / Cost of same basket at location B (base location) * 100;
By price index convention, the value of the spatial price index of the reference (base) location is set at 100.0 whereas the spatial price index of each of the comparison locations is expressed as percentage of this value. For example, a spatial price index of 110 for a comparison location would mean that the average cost of a given basket of consumer goods and services is 110 percent of its cost at the reference (base) location. Or, the average cost of the consumption basket at the comparison location is 10 per cent higher than that of the reference (base) location. Alternatively, we could say that the purchasing power of money at location A is, because of the higher prices, 91 per cent of what it could buy at location B.
Strictly speaking, a spatial price index is not a "true" cost of living index. The latter measures the cost differential between a reference location against a comparison one for maintaining the same standard of living. The concept of a standard of living connotes well-being or utility which is not within the purview of spatial consumer price index.
For this report, spatial price indexes are calculated for 34 selected communities of Alberta with Edmonton constituting the reference location (base location).
The methodology
Price indexes are constructed through phases of lower level and higher level price aggregation. Lower level aggregation is done, at the level of uniquely defined goods and services such as varieties of milk, whose prices are sampled from retail outlets. After computing the individual price relatives of these product varieties, they are aggregated using the geometric mean formula to arrive at an unweighted price index for the elementary aggregate of the product, milk.
Higher level price indexes are produced through aggregation of lower level price indexes by weighting them with the relevant consumption expenditures of the average consumer. Here, the rule of aggregation is weighted summation of lower level price indexes
Expenditure weights used for constructing the spatial price indexes are derived from the spending patterns of the average household in Edmonton, as reported by the Survey of Household Spending (SHS) of 2014. The data are normalized to take into account the size and product composition of the selected products for the analysis.
The price indexes are based on samples of price quotes collected from retail outlets in person and on the internet.