Catalogue no XPB Your Guide to the Consumer Price Index

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1 Catalogue o XPB Your Guide to the Cosumer Price Idex (Texte fraçais au verso) Statistics Caada Statistique Caada

2 Data i may forms Statistics Caada dissemiates data i a variety of forms. I additio to publicatios, both stadard ad special tabulatios are offered. Data are available o the Iteret, compact disc, diskette, computer pritouts, microfiche ad microfilm, ad magetic tape. Maps ad other geographic referece materials are available for some types of data. Direct olie access to aggregated iformatio is possible through CANSIM, Statistics Caada s machie-readable database ad retrieval system. How to obtai more iformatio Iquiries about this publicatio ad related statistics or services should be directed to: Cliet Services Uit, Prices Divisio, Statistics Caada, Ottawa, Otario, K1A 0T6 (telephoe: (613) , fax: (613) ), Iteret: or to the Statistics Caada Regioal Referece Cetre i: Halifax (902) Regia (306) Motréal (514) Edmoto (403) Ottawa (613) Calgary (403) Toroto (416) Vacouver (604) Wiipeg (204) You ca also visit our World Wide Web site: Toll-free access is provided for all users who reside outside the local diallig area of ay of the Regioal Referece Cetres. Natioal equiries lie Natioal telecommuicatios device for the hearig impaired Order-oly lie (Caada ad Uited States) How to order publicatios Statistics Caada publicatios may be purchased from local authorized agets ad other commuity bookstores, the Statistics Caada Regioal Referece Cetres, or from: Statistics Caada Operatios ad Itegratio Divisio Circulatio Maagemet 120 Parkdale Aveue Ottawa, Otario K1A 0T6 Telephoe: (613) Fax: (613) Toroto (credit card oly): (416) Iteret: Stadards of service to the public To maitai quality service to the public, Statistics Caada follows established stadards coverig statistical products ad services, delivery of statistical iformatio, cost-recovered services ad services to respodets. To obtai a copy of these service stadards, please cotact your earest Statistics Caada Regioal Referece Cetre XPB96001

3 Statistics Caada Prices Divisio Your Guide to the Cosumer Price Idex Published by authority of the Miister resposible for Statistics Caada Miister of Idustry, 1996 Reproductio of this documet is permitted for educatioal purposes subject to the requiremet that Statistics Caada is ackowledged as the source o all copies as follows: "Statistics Caada, Your Guide to the Cosumer Price Idex, Catalogue No XPB, 1996", ad the page refereces. All other rights are reserved. Writte permissio must be obtaied for ay other uses from Licece Services, Marketig Divisio, Statistics Caada, Ottawa, Otario, Caada K1A 0T6. December 1996 Catalogue o XPB Frequecy: Occasioal ISBN Ottawa Note of appreciatio Caada owes the success of its statistical system to a log-stadig co-operatio ivolvig Statistics Caada, the citizes of Caada, its busiesses, govermets ad other istitutios. Accurate ad timely statistical iformatio could ot be produced without their cotiued co-operatio ad goodwill.

4 This publicatio was writte for the geeral public iterested i obtaiig a brief o-techical itroductio to the Cosumer Price Idex (CPI). It poses ad aswers some of the more frequetly asked questios relatig to the costructio, iterpretatio ad use of this idex. This publicatio, prepared by Gail Loga ad Heather Pearl, relates to the 1992 basket ad the 1986 time base. The work was carried out uder the directio of: Louis Marc Ducharme, Director, Prices Divisio Margaret Parlor, Chief, Cosumer Prices Sectio Joae Moreau, Head, Cliet Services Uit Previous versios of this documet, relatig to earlier baskets ad time bases, were prepared by Harold Hararie, Seior Ecoomist, Prices Divisio. Caadia Cataloguig i Publicatio Data Mai etry uder title: Your Guide to the Cosumer Price Idex. Text i Eglish ad Frech with Frech text o iverted pages. Added t.p. title: Votre guide d'utilisatio de l'idice des prix à la cosommatio. ISBN CS XPB 1. Cosumer price idexes Caada Hadbooks, mauals, etc. l. Statistics Caada. Prices Divisio. HB235.C2Y C E The paper used i this publicatio meets the miimum requiremets of America Natioal Stadard for Iformatio Scieces Permaece of Paper for Prited Library Materials, ANSI Z Statistics Caada - Catalogue No XPB

5 Table of Cotets Page What is the CPI? 1 Miscoceptios About the CPI 2 How the CPI Relates to You 3 The Goods ad Services Cotaied i the CPI Basket 4 The Relative Importace of Commodities i the CPI Basket 5 Updatig the CPI Basket 5 Collectig Prices 5 Dealig with Quality Chage 7 Calculatig Idexes 7 The CPI Time Base 8 Calculatig Percetage Chages 9 Usig the CPI to Adjust Paymets 10 Usig the CPI to Compare Dollar Values Over Time 10 CPI ad Other Related Publicatios 12 Glossary of Terms 13 Iquiries relatig to all aspects of the CPI should be directed to the Cliet Services Uit i Prices Divisio of Statistics Caada, or to a Statistics Caada Regioal Referece Cetre. The telephoe umbers of these offices are listed o the iside cover of this booklet. Statistics Caada - Catalogue No XPB

6 TABLE - 1 The Cosumer Price Idex ad Major Compoets, (Not Seasoally Adjusted), Caada, 1986=100 Idexes Percetage chage May 1996 from May April May April May All-items Food Shelter Household operatios ad furishigs Clothig ad footwear Trasportatio Health ad persoal care Recreatio, educatio ad readig Alcoholic beverages ad tobacco products Goods Services All-items excludig food ad eergy Eergy Purchasig power of the cosumer dollar expressed i cets, compared to All-items (1981=100) Statistics Caada - Catalogue No XPB

7 What is the CPI? The Cosumer Price Idex (CPI) is a measure of the rate of price chage for goods ad services bought by Caadia cosumers. It is the most widely used idicator of price chages i Caada. The Caadia CPI bega with a study coducted by the Departmet of Labour i the early 1900 s. The study was based o a hypothetical family budget that represeted weekly expeditures of a urba workig class family of five. Retail prices of 29 food items ad five fuel ad lightig items were collected i approximately 60 cities. I additio, iformatio was obtaied o the ret for a represetative worker s dwellig. Sice the, the CPI has grow i comprehesiveess ad detail to keep pace with icreases i its use. Today, the CPI directly or idirectly affects early all Caadias. Cosider the followig: Thik of the CPI as a measure of the percetage chage over time i the average cost of a large basket of goods ad services purchased by Caadias. The quatity ad quality of the goods ad services i the basket remai the same. Therefore, chages i the cost of the basket over time are ot due to chages i the quatity ad/or quality of the goods ad services observed. The CPI is defied, more precisely, as a idicator of the chages i cosumer prices experieced by Caadias. It is obtaied by comparig, through time, the cost of a fixed basket of commodities purchased by Caadia cosumers i a particular year. Sice the basket cotais commodities of uchagig or equivalet quatity ad quality, the idex reflects oly pure price movemets. Old Age Security pesios, Caada Pesio Pla paymets, ad other forms of social ad welfare paymets are adjusted periodically to take accout of chages i the CPI. Retal agreemets, spousal ad child support paymets ad other forms of cotractual ad price-settig arragemets are frequetly tied i some maer to movemets i the CPI. Cost-of-livig adjustmet (COLA) clauses lik wage icreases to movemets i the CPI. Labour cotracts goverig the wages of may Caadia workers iclude COLA clauses. The CPI is relevat to all those who ear ad sped moey. Whe prices rise, the purchasig power of moey drops. Whe prices drop, it meas the purchasig power of moey icreases. The CPI is frequetly used to estimate the extet to which this purchasig power of moey chages i Caada. For these reasos, it is a widely used measure of iflatio (or deflatio). The Cosumer Price Idex for a give moth is usually published i the third week of the followig moth, ad it is ot revised oce it has bee published. This makes it suitable for users who must have timely ad fial data. If you are cocered with everythig i the CPI basket, you would use the All-items idex. If you are lookig for somethig more specific, you may choose from the may idex series available. These rage from idexes for idividual items to those for groups of items. Examples iclude series for potatoes, food purchased from stores, gasolie, operatio of automotive vehicles, goods, services, ad eergy. Detailed CPIs are published simultaeously for Caada, the te provices, Whitehorse ad Yellowkife. Whitehorse represets the Yuko, ad Yellowkife, the Northwest Territories. I additio, some iformatio is available for sixtee cities across Caada. If there is o CPI for, say, your home tow, you ca choose a provicial idex or the Caada idex. Your choice will deped o your eeds. Statistics Caada - Catalogue No XPB 1

8 Seasoally adjusted data for selected series provide a additioal source of useful iformatio for certai aalytical purposes. To meet this specialized eed, Statistics Caada calculates a limited umber of mothly cosumer price idexes from which seasoal iflueces are removed to provide a better idicatio of treds i price chages. These series are subject to revisio. Seasoally adjusted series are ot recommeded for use i idexatio. Miscoceptios About the CPI The Cosumer Price Idex is ofte perceived as the oly measure of the rate of price chage. This is a commo miscoceptio. The CPI is oe of may price chage measures available to the public. It reflects the experiece of Caadia cosumers buyig cosumer goods ad services. Statistics Caada publishes a umber of measures of price chage for differet target groups, for differet products, ad usig differet methodologies. Take the evolutio of gasolie prices as a example. Depedig o the circumstaces, it might be more useful to examie the price of gasolie at the gas pump (from the CPI), the price of gasolie as it leaves the refiery (from the Idustrial Product Price Idex), or world crude oil prices (from the Raw Materials Price Idex). the New Housig Price Idexes measure chages over time i the cotractors sellig prices of ew residetial houses. the Machiery ad Equipmet Price Idexes measure price chages for ivestmet i machiery ad equipmet by idustry of purchase. Price idexes are calculated for idustries, major groups of idustries, the total for all idustries, as well as for commodities. the No-residetial Buildig Costructio Price Idexes measure cotractors sellig price chages of ew o-residetial costructio (i.e., commercial, idustrial ad istitutioal). The idexes relate to both geeral ad trade cotractors work ad exclude the cost of lad, desig ad real estate fees. the Farm Iput Price Idexes measure price chages of a basket of goods ad services purchased by Caadia farmers for use i agricultural productio. the Idustrial Product Price Idexes measure the chages i prices received by Caadia maufacturers for goods as they leave the factory gate. Idirect taxes, trasportatio, wholesale ad retail costs are ot icluded i the price. Almost 1300 basic idexes are available. the Raw Materials Price Idexes measure price chages for the purchase of raw materials by Caadia idustry. The term raw material refers either to a commodity that is sold for the first time after beig extracted from ature, or a substitutable recycled product (e.g. metal scrap). the Farm Product Price Idexes measure the chage through time i the prices received for agricultural commodities at the first trasactio poit. the Price Idexes of the Natioal Accouts measure the price chage of broad categories of goods ad services makig up the Gross Domestic Product (GDP). The Cosumer Price Idex is ot a measure of price levels, although people sometimes misiterpret the CPI figures as actual prices. Price idexes show the rate at which prices chage betwee two periods. For example, cosumer price idexes for Jauary 1995 were as follows: orages, 100.5, ad apples, (1986=100). From these umbers, we caot coclude that the price of apples was higher tha the price of orages. The idexes show that orage prices rose 0.5% sice 2 Statistics Caada - Catalogue No XPB

9 1986 while apple prices rose 17.9%. What we ca coclude is that, o average, apple prices rose more tha orage prices betwee 1986 ad Jauary Similarly, i Jue 1995, the All-items CPI for Newfoudlad was ad for British Columbia it was (1986=100). We caot coclude that prices as a whole were lower i Newfoudlad tha i British Columbia. What we ca say is that, o average, prices icreased more i British Columbia tha they did i Newfoudlad betwee 1986 ad Jue The actual prices i Newfoudlad could very well be higher tha those i British Columbia. If you are lookig for actual prices or price level comparisos, some iformatio is available i the Cosumer Prices ad Price Idexes quarterly publicatio (Catalogue No XPB). Table 5 carries average retail prices at the Caada level for certai goods (mostly food items). Table 10 compares price levels betwee eleve Caadia cities for a umber of commodity groups. Table 11 cotais average retail prices for gasolie ad fuel oil for sixtee Caadia cities. Table 15 compares price levels i Ottawa with those of thirtee foreig cities. The CPI is ot a cost-of-livig idex, though people frequetly call it this. I theory, the objective behid a cost-of-livig idex is to measure price chages experieced by cosumers i maitaiig a costat stadard of livig. The idea is that cosumers would ormally switch betwee products as the price relatioship of goods chages. If, for example, cosumers get the same satisfactio from drikig tea as they do from drikig coffee, the it is possible to substitute tea for coffee if the price of tea falls relative to the price of coffee. The cheaper of the iterchageable products may be chose. We could compute a cost-of-livig idex for a idividual if we had complete iformatio about that perso s taste ad cosumig habits. To do this for a large umber of people, let aloe the total populatio of Caada, is impossible. For this reaso, regularly published price idexes are based o the fixed basket cocept rather tha the costof-livig cocept. Statistics Caada - Catalogue No XPB How the CPI Relates to You Every moth, the ews media report the CPI figures to the Caadia public. Some people questio these figures because their persoal experiece does ot seem to match what is beig reported. It is importat, however, to uderstad that the CPI measures the average chage i retail prices ecoutered by all cosumers i Caada. It caot, ad should ot, be expected to reflect the price chage experiece of ay particular household or perso. The CPI basket cotais a extesive list of goods ad services. Each cosumer buys a differet combiatio of these goods ad services, ad it would be ulikely for ay cosumer to buy everythig o the list at oe poit i time. For istace, it would be highly uusual to fid a cosumer usig both fuel oil ad atural gas for home heatig. However, both fuels are icluded i the CPI sice both are importat i the spedig patter of Caadia cosumers as a whole. Iformatio o the spedig habits of Caadia households is obtaied periodically from family expediture surveys. I oe survey, households selected from a radom sample are asked to keep a detailed diary of food expeditures over a twoweek period. I the other survey, the radomlyselected households are asked to provide detailed iformatio o what goods ad services were purchased i the previous caledar year together with the amout of moey spet o these items. No two households are exactly alike i their spedig habits. By combiig the iformatio from may households, it is possible to develop a broad picture of the spedig patters of the whole populatio. The expediture data used as weights i the CPI represet the spedig habits of households situated i the te provices, Whitehorse ad Yellowkife. For may years, the CPI related to the spedig behaviour of the populatio i urba cetres of 30,000 or more. This accouted for about 75% of total cosumer spedig i Caada. I Jauary 1995, the 1992 expediture weights were itroduced ito the CPI. Sice the, the CPI weights have reflected the spedig behaviour of early all Caadia urba ad rural private households. 3

10 The Goods ad Services Cotaied i the CPI Basket The goods ad services icluded i the CPI basket are those cosidered to be cosumer items. They must be associated with a retail price. This retail price is the sum of moey that a cosumer must pay to purchase a specific quatity ad quality of a good or service. Examples of excluded items are icome taxes, charitable doatios, cotributios made to pesio plas, ad cosumer savigs ad ivestmets. Icome taxes are excluded because it is impossible to associate a specific amout of tax paid with a specific quatity of services received. By defiitio, the other excluded items are ot cosidered to be cosumer items. No attempt is made to differetiate betwee luxuries ad ecessities, ad othig is omitted o the basis of moral or social judgemet. Some people may regard the use of tobacco ad alcohol as socially udesirable. However, these products are icluded i the CPI basket because they make up a otable proportio of the expeditures of Caadia families ad idividuals. The goods ad services are orgaized accordig to a classificatio system. Every product has a uique place i this classificatio. Products are grouped with other items either because they have a commo ed-use or because they are cosidered substitutes for each other. These families of products are joied together at differet levels i the classificatio system to form a hierarchy. The lowest level is called a basic class while the highest level, before the All-items, is kow as a major compoet. The goods ad services i the CPI basket are grouped ito 182 basic classes. A product like toothpaste belogs to the basic class Oral-hygiee products, which i tur, comes uder the larger group Persoal care supplies ad equipmet. The latter group falls uder Persoal care. Whe Persoal care ad Health care are combied, they make up the major compoet called Health ad persoal care. HEALTH AND PERSONAL CARE 1 Persoal care (+ Health care) Persoal care supplies ad equipmet Oral-hygiee products 2 Toothpaste 3 Idexes are computed for each of the basic classes foud i the classificatio system. They are aggregated followig the hierarchy of the classificatio to arrive at eight major compoets, ad fially, the All-items. ALL-ITEMS, CPI 1. Food 2. Shelter 3. Household operatios ad furishigs 4. Clothig ad footwear 5. Trasportatio 6. Health ad persoal care 7. Recreatio, educatio ad readig 8. Alcoholic beverages ad tobacco products Idex makers ca combie categories i differet ways to meet specific eeds. Oe log-stadig combiatio is the All-items excludig food ad eergy idex which, i the opiio of some policy makers, is a better idicator of uderlyig treds i overall price movemets tha the All-items idex. Other well-kow combiatios iclude Goods, Services, Eergy ad All-items excludig tobacco products. 1 Major compoet. 2 Basic class. 3 Product for which a price is collected. 4 Statistics Caada - Catalogue No XPB

11 The Relative Importace of Commodities i the CPI Basket The spedig associated with each basic class i the CPI basket is compared to the total spedig i Caada. These proportios idicate the relative importace, or weight, of a commodity i the CPI basket. Weights determie the impact that a particular price chage will have o the overall cosumer budget. For example, a 5% rise i the price of milk would have a much greater impact o the average budget of cosumers tha a 5% icrease i the price of tea, because people sped o average more moey o milk tha they do o tea. The weight for Caada assiged to milk (0.69%) is greater tha that of tea (0.06%). Without weights, price chages for all commodities i the CPI basket would be give equal importace i the calculatio of the All-items idex. Computig the weight for a give commodity is a relatively simple matter. To illustrate, take cosumers spedig o gasolie. The average spedig per household i a give provice 4 is multiplied by the estimated umber of households i that provice to arrive at the total expediture for gasolie. The total expeditures are added up across provices to arrive at the estimated total expeditures o gasolie for Caada. The proportio of this estimate to the grad total of spedig o all goods ad services i the CPI basket becomes the expediture weight for gasolie i the Caada CPI. The eight major compoets of the CPI appear i Figure A o page 6. The weight for each compoet is represeted as a proportio of the total expeditures for the 1992 CPI basket. These are expressed i December 1994 prices. 4 The term provice also icludes the cities of Whitehorse ad Yellowkife which represet the Yuko ad Northwest Territories, respectively. Updatig the CPI Basket The cotet of the CPI basket is reviewed ad updated periodically to esure that it remais relevat. A major part of this review ivolves replacig existig weights with those obtaied from the family expediture surveys of a more recet period. Chages i spedig patters reflect chages i such factors as the compositio ad distributio of the populatio, the quality ad availability of goods ad services, persoal icomes, wealth, ad cosumer taste. I recet years, the CPI weights have bee based o family expeditures for 1974, 1978, 1982 ad The curret set of weights refer to household expeditures for 1992, ad were itroduced ito the CPI i Jauary Basket updates also provide the opportuity to review CPI methodology, cocepts ad procedures, ad to implemet chages. The purpose of these modificatios is to make the CPI a better idicator of cosumer price movemets at the atioal ad provicial levels. Collectig Prices Sice the Cosumer Price Idex is desiged to measure price chages experieced by Caadia cosumers, the prices used i the CPI are those that ay cosumer would have to pay o the day of the survey. This meas that if a item is o sale, the sale price is collected. Because sales taxes are part of the price paid by the cosumer, they are icluded i the fial price used i the calculatio of the CPI. Prices are collected for over 600 separate goods ad services. They rage from groud beef to haircuts ad from spark plugs to property taxes. It is either practical, or ecessary, to price all the items that cosumers buy sice may items show similar price movemets. By carefully selectig represetative items, we ca reflect price chages for a much wider rage of products tha those observed directly. Statistics Caada - Catalogue No XPB 5

12 Most commodities are priced oce a moth. Some items, such as haircuts ad dry-cleaig services are priced each quarter. Property taxes ad tuitio fees are moitored oce a year. Geerally, the more ofte prices chage, the more ofte they are collected. I cases where goods appear o the market seasoally, prices are collected durig the seaso whe they are available. Also, whe prices chage outside the scheduled time of collectio, a special price collectio may be carried out to esure that such chages are reported i the CPI i a timely fashio. The pricig cycle starts i the first week of each referece moth ad exteds to the third week of the moth. The idexes that result from this price collectio activity represet the etire moth. Some users ask for the idex for a particular day of the moth, like April 1, Jue 15 or December 31. This iformatio is ot available, ad users have to decide which moth s idex best meets their particular requiremets CPI Weights by Major Compoet, for Caada, Expressed i Percetages Health & persoal care 4.3% Recreatio, educatio & readig 10.4% Alcoholic beverages & tobacco products 4.5% Trasportatio 18.3% Food 18.0% Clothig & footwear 6.6% Household operatios & furishigs 10.0% Shelter 27.9% Figure A 6 Statistics Caada - Catalogue No XPB

13 The price collectio activity takes place all across Caada. It is carried out i outlets from which cosumers ormally buy. The sample of outlets icludes supermarkets, specialty shops, departmet stores, garages, detal offices, hairdressig salos, etc. Bus, rail ad air fares, electricity ad gas rates, telephoe charges, ad property taxes are collected from the appropriate local ad regioal authorities. Iformatio o retal charges for livig accommodatio is obtaied from a mothly survey of thousads of teats. Over 60,000 price quotatios are collected each moth by skilled iterviewers operatig out of the regioal offices of Statistics Caada. To esure that price movemets reflect the experiece of most of the populatio, the iterviewers follow the prices of the brads ad varieties which sell i the greatest volume. Iterviewers also try to obtai reasos for sigificat price chages. This iformatio is used i verifyig the data ad i explaiig the overall results. Dealig with Quality Chage The objective of the Cosumer Price Idex is to measure pure price chage. As a result, the quatity ad quality of the goods ad services icluded i the CPI basket have to be held costat. I the real world, however, the quality of goods is cotiually chagig as ew models ad varieties replace earlier oes. Price icreases that are due to a improvemet i the quality of a product are ot treated as pure price chages. A commo adjustmet techique is to determie which feature of a product causes the quality to chage. If, for example, air coditioig becomes a stadard feature i the ewer model of a certai car, the we would price models with that feature. To compare the prices of the older ad ewer models, however, they must first be put o a equal footig. The estimated value of air coditioig is therefore added to the price of the older vehicle. The prices of the two vehicles ca ow be compared because the price of the air coditioig equipmet is icluded i both. Other adjustmet techiques are described i the Cosumer Price Idex Referece Paper (Catalogue No ). The problems ecoutered i adjustig prices for quality chages are complex ad sometimes impossible to solve i a fully satisfactory maer. This is especially true i evaluatig the quality chage i services. For example, it is fairly easy to moitor chages i bus ticket prices. But, how would you attach a dollar value to the chages i the frequecy or puctuality of the bus service? A chage i the quality of that service may well have cotributed towards a chage i the bus ticket prices. Calculatig Idexes Oce price quotatios are gathered, they udergo a careful screeig. This is to esure the validity of the data that will be used i the CPI calculatios. The checkig procedure ivolves close scrutiy of items for which prices are collected i the curret moth to make certai that they are equivalet to those for which prices were collected i the previous moth. The calculatio of the mothly All-items idex starts with the measuremet of the price chage for a particular product. Price idexes for the products are combied followig the hierarchy of the classificatio, with the appropriate weights beig applied alog the way. For istace, the price idexes for milk, butter, cheese, ad other dairy products are combied to form a idex for dairy products. Similarly, the various price idexes for ladies clothig are combied to obtai a wome s wear idex. These group idexes are the further combied to come up with major compoet idexes, i these cases, Food ad Clothig ad footwear. Fially, the major compoet idexes are combied to arrive at the All-items idex. The first step i calculatig a price chage is to obtai a average price for a product i both the give moth ad the previous moth. As a illustratio, cosider the price chage of cheese i Nova Scotia betwee Jauary ad February. The prices Statistics Caada - Catalogue No XPB 7

14 collected i February are reviewed to esure that they refer to the same quatity ad quality of cheese, ad were collected i the same stores, as i the previous moth. Average prices for Nova Scotia are the calculated for Jauary ad February usig this matched sample. The secod step is to compute a mothly price relative. This is the ratio of February s average price to Jauary s average price. If the average prices for Jauary ad February were $2.80 ad $2.86 respectively, the the price relative for February would be: $2. 86 = $2. 80 This ratio idicates a 2.1% icrease i the average price of cheese i Nova Scotia from Jauary to February. The third step is to calculate the price idex for cheese i Nova Scotia for the moth of February. This is obtaied by multiplyig the idex level for Jauary by the price relative for February. If the idex for Jauary was (1986=100), the February idex would be: = ( 1986 = 100) Price idexes for cheese for February are calculated similarly for all provices across Caada. To obtai the cheese idex for Caada, you must first calculate a Caada price relative. This relative is obtaied by applyig the appropriate weights to the provicial price relatives. The February cheese idex for Caada is the calculated by multiplyig the Caada idex level for Jauary by the Caada price relative for February. Ofte, people wat to combie idex series ito ew aggregates that are tailored to serve their particular purposes. Special procedures have to be used whe aggregatig idexes across provices ad across commodities. Whe recostructig or re-aggregatig published CPI series, the chages i weights ad the likig procedures must be take ito accout. For a descriptio of the methodology required to perform these tasks, see the Cosumer Price Idex Referece Paper (Catalogue No ). Alteratively, please cotact the represetatives of the Cliet Services Uit of Prices Divisio (see iside cover) who ca advise you o how to calculate these types of idexes, or, for a fee, ca calculate them o your behalf. The CPI Time Base The time base, or base period, of a idex is the period i which the idex is give a value of 100. At preset, the CPI time base is The stadard practice, whe quotig a idex level, is to esure that the base period is also quoted. For istace, the CPI All-items for Caada for the moth of Jauary 1995 was (1986=100). This meas that cosumer prices were 32.1% higher i Jauary 1995 tha i Statistics Caada will always quote the CPI figures from the curret time base, uless the cliet specifies otherwise. The CPI time base is updated periodically to coicide with the chage i the time base of other major statistical series at Statistics Caada. Startig with the idexes of Jauary 1983, the CPI time base was chaged from 1971 to The 1986 CPI time base came ito effect with the release of the CPI for Jue Historical series have bee coverted to the 1986 time base. To esure cotiuity ad ease of use, it is practical to use idexes that are o the most curret base year (time base). If you eed to covert data to a differet time base, rebasig is achieved by either multiplyig or dividig the series by a factor. The Cliet Services Uit of Prices Divisio, or ay Statistics Caada Regioal Referece Cetre, ca advise you o the proper procedures for accomplishig this task. Covertig a time series from oe time base to aother merely chages the level of the idexes. The percetage chages calculated betwee the same two periods do ot chage from oe time series to aother, other tha because of roudig. 8 Statistics Caada - Catalogue No XPB

15 Roudig may become a factor whe the CPI is used for idexatio. Statistics Caada recommeds that the parties to a cotract use the most curret time base to reduce ambiguity or ucertaity. Calculatig Percetage Chages To illustrate the most frequet calculatios doe with price idexes, we shall use data from Table 2 i the cetre of the booklet. Table 2 has three sectios. I the first sectio, the idex levels for the All-items CPI for Caada are give by moth. These mothly idexes are averaged over the twelve caledar moths to arrive at the aual average idex. The three most frequetly requested percetage chages are those: (a) (b) (c) betwee a give moth ad the precedig moth; betwee a give moth ad the same moth of the previous year; ad betwee the aual average idex of a give year ad that of the previous year. The secod ad third sectios of Table 2 feature these percetage chages. They are calculated from the idexes i the first sectio. To illustrate (a), the percetage chage i the idex betwee September ad October 1994 is calculated as follows: ( ) 100% = 0. 2% The result of this moth-to-moth price chage calculatio tells us that from September to October 1994, prices dropped by a average 0.2% i Caada % = All cases that follow will employ this formula. To illustrate (b), the percetage chage i the idex betwee December 1994 ad December 1995 is calculated as follows: % = I this case, the price chage over 12 moths is positive, which tells us that prices rose 1.7% o average betwee December 1994 ad December 1995 i Caada. To illustrate (c), the percetage chage i the aual average idex betwee 1994 ad 1995 is calculated as follows: % = The result of this calculatio tells us that prices i Caada rose 2.1% o average betwee the years 1994 ad You may calculate percetage price chages over ay two periods. To do these calculatios, always remember to divide the more recet idex by the older idex, multiply by 100, ad the subtract 100. Care must be take to distiguish betwee chages expressed i idex poits ad chages expressed as percetages. Chages expressed i idex poits will vary depedig o the base period of the idexes. Statistics Caada recommeds usig the percetage chage approach because percetage chages are idepedet of the level of the idex. May people cosider the equivalet formula more coveiet: Statistics Caada - Catalogue No XPB 9

16 Usig the CPI to Adjust Paymets Whe the Cosumer Price Idex is used as a escalatio tool, a clause is writte ito a cotract by which a sum of moey to be paid i the future is automatically adjusted by chages i the CPI. This type of clause is called a escalatio clause. I may cotracts, they are called costof-livig adjustmet or COLA clauses. Here are some examples. Example 1 Assume a separatio or divorce agreemet cotais the followig clause: The basic child support paymet is $300 per moth effective May 1, Every May 1 thereafter, paymets will be adjusted by the percetage chage over 12 moths i the March All-items CPI for Caada. This cotract clause meas that the child support paymets will be adjusted at whatever percetage chage the idex shows betwee March 1994 ad March 1995, the agai betwee March 1995 ad March 1996, ad so forth. From Table 2 (i the cetre of the booklet), we see that the All-items CPI for Caada icreases were 2.2% i the first year ad 1.4% i the secod. O May 1, 1995, the mothly support paymet would icrease by $6.60, which is 2.2% of $300, equallig $ O May 1, 1996, the mothly paymet would icrease by $4.29, which is 1.4% of $ The resultig paymet would be $ Example 2 Old Age Security (OAS) pesios are adjusted every Jauary, April, July ad October usig the All-items CPI for Caada. OAS paymets are adjusted usig the average idex levels for the CPI referece moths, as show: Jauary April July October Ù August, September ad October Ù November, December ad Jauary Ù February, March ad April Ù May, Jue ad July The average of the idexes for August, September ad October 1995 equals while the average of the idexes for November 1995, December 1995 ad Jauary 1996 is If we take the basic paymet of $394.76, i effect betwee Jauary ad March 1996, we obtai the adjusted OAS paymet for April 1, 1996 by doig the followig calculatio: This meas that the OAS paymet of $ will icrease by 0.2% or $0.79 o April 1, makig the adjusted paymet $ Example % = Caada Pesio Pla (CPP) paymets are idexed oce a year i Jauary. The CPP formula averages the idexes for twelve cosecutive moths, divides the result by the average of the precedig twelve moths, multiplies by 100, ad the subtracts 100. The observed twelve moths refer to the period from November of oe year to October of the ext. As a example, take a hypothetical CPP paymet of $450 a moth. The average of the idexes for November 1993 to October 1994 is 130.7, ad the average for November 1994 to October 1995 is The Cosumer Price Idex icreased by 1.8% betwee these two periods. The CPP paymet would therefore icrease by $8.10 to $ i Jauary Usig the CPI to Compare Dollar Values Over Time Most people ca idetify with the phrase A dollar just does t stretch as far as it used to. Whe prices rise, a dollar buys fewer goods ad services. Because the CPI measures chages i the geeral price level, it is ofte used to estimate chages i the purchasig power of the Caadia dollar. I Table 1 at the begiig of the booklet, we see that the CPI for May 1996 is For 1986, the base year, it is From these umbers, we 10 Statistics Caada - Catalogue No XPB

17 ca readily coclude that cosumer prices rose 35.7% betwee 1986 ad May To fid out how much moey i 1986 had the same purchasig power as $1.00 did i May 1996, the calculatio is: $1. 00 $ = or. cets This meas that, i May 1996, $1.00 had the same value as 73.7 cets did i Each moth, Statistics Caada calculates the purchasig power of the dollar, usig the above method, by comparig the mothly All-items idex for Caada to the curret base period (1986=100) of the CPI. However, you ca compare the purchasig power of moey betwee ay two periods. For istace, if you wated to kow how much moey i July 1995 had the same purchasig power as $1,000 did i Jauary 1977, you would use the CPI idexes for these two moths (the Jauary 1977 idex is 49.1, ad the July 1995 idex is 134.0), ad perform the followig calculatio: $1, $1, 000 $2, = = Coversely, if you wated to kow how much moey it would have take i Jauary 1977 to equal the purchasig power of $1,000 i July 1995, you would do the followig calculatio: $1, $1, 000 $ = = Usually, dollar figures are expressed i curret dollars. This meas that the dollar values are expressed at the prices prevailig durig the period beig referred to. I the table that follows, a family s aual expeses are examied. We show that the family spet $20,000 i 1985 curret dollars, $25,000 i 1990 curret dollars, ad $30,000 i 1995 curret dollars. These figures caot be compared directly to oe aother because a dollar i 1985, i 1990, ad i 1995 was ot worth the same amout. To compare dollar figures over time, we must covert the curret dollar values to costat dollar values. This meas that the curret dollar figures are all re-expressed i terms of the value of the dollar at a specific time. The CPI is ofte used to do this coversio, ad here, we show how it is doe. (1) (2) (3) All-items CPI (1986=100) Expeses i Curret Dollars Expeses i Costat 1986 Dollars 1985 $20, $20, $25, $20, $30, $22,472 The figures i Colum (1) iclude the effects of price chages. These expeses are coverted ito costat 1986 dollars by dividig them by the correspodig 1986-based idexes show i Colum (2), ad multiplyig the result by 100 (the idex of the base year). The results i Colum (3) show the expeses for all three years with the effects of price chages removed. These costat dollar values provide a better idicatio of real expeditures, ad ca ow be compared to oe aother. May people believe that a real icrease (or a icrease after removig the effects of iflatio) is the differece betwee the percetage chage i the curret dollars ad the rate of iflatio. This is a icorrect way to estimate real value icreases. I the above table, expeditures rose by 50% betwee 1985 ad 1995, while prices icreased by 39.1%. These percetages were obtaied by doig the followig calculatios: Statistics Caada - Catalogue No XPB 11

18 $30, 000 $20, = 50.0% ad Accordig to the method metioed i the previous paragraph, the icrease i expeditures would be 10.9%. However, the actual icrease is 7.9%. Icorrect = 39.1% 50. 0% 39. 1% = 10. 9% Some CPI data are also available i: The Caadia Ecoomic Observer, (Mothly), Catalogue No XPB, a compedium publicatio. Iformatio regardig the latest Family Expediture Surveys is cotaied i two volumes: Family Food Expediture i Caada, 1992, Catalogue No ; ad Family Expediture i Caada, 1992, Catalogue No To fid out how to obtai these or other Statistics Caada publicatios, please see the iside frot cover of this booklet. Correct $22, % $20, 833 = Educators will fid the E-STAT CD-ROM, which icludes teachig materials, a useful tool for itroducig the CPI to their classes. Please cotact the Statistics Caada Regioal Referece Cetre earest you for more details. CPI ad Other Related Publicatios Data ad aalysis o the Cosumer Price Idex are available i prited form i: The Cosumer Price Idex, (Mothly), Catalogue No XPB; ad the Cosumer Prices ad Price Idexes, (Quarterly), Catalogue No XPB. Detailed iformatio o the methodology ad cocepts of the CPI is cotaied i: The Cosumer Price Idex Referece Paper, Update Based o 1992 Expeditures, (Occasioal), Catalogue No Statistics Caada - Catalogue No XPB

19 Glossary of Terms Base period - A syoym of the time base of a idex. Basic class - The lowest-level aggregates of commodities for which a set of weights is available (ormally derived from the family expediture surveys) that is cosistet with the fixedbasket cocept of the CPI. Costat dollars - A valuatio i costat dollars is expressed at the prices prevailig durig some fixed referece or base period. Cost-of-livig adjustmet clause (COLA) - A clause writte ito a cotract which liks wage icreases to movemets i the CPI. Cost-of-livig idex - I theory, the objective behid a cost-of-livig idex is to measure price chages experieced by cosumers i maitaiig a costat stadard of livig. The idea is that cosumers would ormally switch betwee products as the price relatioship of goods chages. Curret dollars - A valuatio i curret dollars expressed at the prices prevailig durig the period beig referred to. Deflatio - A dowward movemet i the average level of prices. Escalatio clause - A clause writte ito a cotract which stipulates that a sum of moey to be paid o a regular basis will automatically be adjusted by chages i a price idex. Fixed basket - A set of commodities with specified ad uchagig quatitative proportios amog its costituet goods ad services. Fixed-basket price idex - A ratio of the cost of a specified basket i the observed period to its cost i the base period. Iflatio - A upward movemet i the average level of prices. Likig procedure - A procedure for coectig, i a certai lik period, two price idex series for a give aggregate, each of them associated with a differet fixed basket; idexes of a ew series whose time base is the lik period are multiplied by the correspodig idex of the old series for the lik period. Major compoets - The eight major compoets of the CPI basket are Food, Shelter, Household operatios ad furishigs, Clothig ad footwear, Trasportatio, Health ad persoal care, Recreatio, educatio ad readig, ad Alcoholic beverages ad tobacco products. Matched sample - A sample that refers to items of the same quatity ad the same, or equivalet, quality i the two compared moths. Moth-to-moth price chage - A price chage betwee oe moth ad the precedig moth. Price chage over 12 moths - The price chage betwee oe moth ad the same moth of the previous year. Price relative - The ratio of the price of a commodity i the observed period to its price i the period used as a base for compariso. Statistics Caada - Catalogue No XPB 13

20 Glossary of Terms (cocluded) Pure price movemet - Price movemet that is ot attributable to chages i either the quality or the quatity of a give good or service. Time base - The period whose prices serve as a base for comparig the observed period prices; i other words, the period i which a idex is 100 i percetage form or 1 i ratio form. Updatig of fixed baskets - The replacemet of a basket by oe that is more recet. Weight - The value assiged to each basic class, which idicates its importace i the fixed basket. I the computatio of a specific weighted average of price idexes, to obtai a aggregate price idex, the weight of each basic class is multiplied by the correspodig price idex. Therefore, the weight determies the degree of ifluece exerted by the price chage of each basic class o the correspodig aggregate price idex. 14 Statistics Caada - Catalogue No XPB

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