STAFF REPORT Financial Planning & Purchasing. Finance & Strategic Planning Committee Meeting Council/Committee Date: September 21, 2015

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1 1 Corporate Services STAFF REPORT Financial Planning & Purchasing Title: Core Consumer Price Index Report Number: CORP Author: Kim Reger Meeting Type: Finance & Strategic Planning Committee Meeting Council/Committee Date: September 21, 2015 File: [File] Attachments: Appendix One CPIX 12 Month Average Ward No.: Click here to enter text. Recommendation: 1. That Council approves CORP That Council approve the CPIX rolling 12 month average of 2.17% for the 2016 budget inflator and 1.80% for 2017 and 2018 budgets. A. Executive Summary The City chose to use the Core Consumer Price Index (CPIX) in 2016 and onward for budget decision making. The CPIX is the Consumer Price Index (CPI) excluding eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components. The Bank of Canada utilizes this index to look through such transitory movement in total CPI inflation, by focusing on core inflation measures such as the CPIX, that are considered to reflect better the underlying trend in inflation. As such the CPIX rolling 12 month average is 2.17% (July 2014 to June 2015). City staff is recommending a 1.80% estimate increase in each fiscal year 2017 and 2018 and will come back each year as customary with a recalculation as economic conditions do change.

2 B. Financial Implications 2 Corporate Services The new proposed rate of 2.17% would generate $1,368,344 of property tax revenue in Per household this increase would be $26.60, annually on an average assessed 2015 value of $351,000. An updated assessed value from the Region for 2016 is not available at this time. This additional funding is used to assist in addressing inflationary pressures in the City s budget. C. Technology Implications D. Legal Considerations Staff did not seek legal advice. E. Link to Strategic Plan (Strategic Priorities: Multi-modal Transportation, Infrastructure Renewal, Strong Community, Environmental Leadership, Corporate Excellence, Economic Development) Corporate Excellence F. Previous Reports on this Topic FIN Municipal Price Index FS Municipal Price Index FS Municipal Price Index FS Municipal Price Index CORP Municipal Price Index CORP Municipal Price Index Review Project CORP Municipal Price Index Review CORP Municipal Price Index CORP CPIX vs. MPI

3 3 Corporate Services G. Approvals Name Signature Date Author: Kim Reger Director: Filipa Reynolds Commissioner: Keshwer Patel Finance: Keshwer Patel CAO

4 4 Corporate Services Core Consumer Price Index CORP Background After considerable discussion, financial policy FC-019 was revised to utilize the Core Consumer Price Index in budget decision making, starting with the 2016 budget. Core Consumer Price Index (CPIX) The Consumer Price Index (CPI) provides a broad measure of the cost of living in Canada. While there are other ways to measure price changes, the CPI is the most important indicator because of its widespread use. Through the CPI, Statistics Canada tracks on a monthly basis, the retail price of a representative shopping basket of about 600 goods and services from an average household s expenditure on food, housing, transportation, furniture, clothing, and recreation. The Core Consumer Price Index (CPIX) is the CPI excluding eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components. Rolling CPIX Percentage The CPIX 12 month rolling average (July 2014 to June 2015) is 2.17% (see Appendix One). It is recommended that 2.17% be used in 2016 budget decision making. Economic Outlook The City of Waterloo is in the midst of a three year budget cycle. While staff is recommending 2016 base budget inflator be set at 2.17% the question remains about appropriate increases for budget out-years 2017 and Staff consulted TD Economics for a more nuanced look at Canada s economic performance. TD expects that the worse of the economic turmoil from slumping oil prices and weak U.S. performance is behind us. The influence of falling investment in the energy sector will gradually wane and the export sector will offer a lift to the economy (due to the weak loonie). It is predicted that the Canadian economy will slowly crawl out of its first quarter slump with modest Q2 performance and should set the wheels in motion for more robust growth in the second half of This momentum is

5 5 Corporate Services expected to carry forward into early 2016 before long-term drivers take hold to temper the economic pace back towards 2% growth. 1 There has been talk of recession in Canada. One of the requirements for calling a recession is a significant and sustained decline in real GDP. The unfortunately pervasive standard rule of thumb of two negative quarters is another possible metric. It looks increasingly unlikely that Canadian GDP will meet either of these criteria. Given positive employment growth throughout the first half of the year, and upward trends in a subset of sectors of the Canadian economy, Canada may yet escape an oil-priceinduced recession. 2 Keeping this point of view in mind it would seem that Canada will likely maintain an inflation rate of near 2% but will likely not exceed it. It would be reasonable to predict inflationary estimates for 2017 and 2018 to be 1.80%. It is City of Waterloo policy to recalculate the inflationary factor each year as economic conditions do change. In the fall of 2016 staff would recalculate the CPIX for 2017 and in the fall of 2017 staff would recalculate for Quarterly Economic Forecast, TD Economics, June 18, 2015 & Long-Term Economic Forecast, TD Economics, June 18, Is Canada in recession? These numbers suggest not, Globe & Mail, S Ambler and J Kronick, Aug 11,2015

6 6 Corporate Services Appendix One Rolling 12 month CPIX Average