The Bank of Canada tracks three alternative measures of the Consumer Price Index (CPI) to better understand what is happening with prices in our economy. These alternative measures try to look beyond changes that are temporary or that only affect one item in the CPI basket but that likely won’t spread to other goods and services.
It is useful to understand the Bank’s forecasts when bargaining. The Bank’s understanding of inflation informs their decision on setting the interest rate, which affects workers in several ways. A higher interest rate tends to slow economic growth, moderate wage growth, and make governments more hesitant to spend.
The Bank’s three inflation measures are:
CPI-trim – excludes CPI items whose rates of change in a month are much bigger or smaller than the average changes. This helps filter out extreme price changes affecting specific CPI basket items.
CPI-median – measures the price change at the midpoint, or 50th percentile, of the range of price changes. This filters out extreme price changes at the top and bottom of the range.
CPI-common – tracks price changes that are common to different CPI basket categories, using a statistical model to filter out price movements that have a specific cause and are not influencing broad changes. For example, if the price of computers increased temporarily because of a breakdown in a chip manufacturing facility, that would not affect other prices, and so would be excluded from this measure.
All three measures have increased over the first half of 2021, which is expected as the economy rebounds from public health restrictions in place for most of the past year and a half. All three measures are also well within the Bank’s target inflation range of one to three per cent, but CPI-trim is nearing the upper limit. This should level off soon – what we are seeing here is partly base year effects (when inflation numbers are deceptively large, because they’re being compared to a temporarily low price level). Since the indicator is a year-over-year change, and last year was unusual and extreme, we will have to interpret CPI-trim with caution for the rest of 2021.
Economists are predicting that Canada will have an overall average CPI increase of 2.6 per cent for 2021, with prices rising faster in Atlantic Canada.
Base wage increases in 2021 have been slightly lower than 2020 in most provinces. Alberta is a notable exception since their average base wage increase in 2020 was only 0.1 per cent, and in 2021 it has been a much healthier 2.4 per cent.
This means that for most workers, wages aren’t keeping up with inflation. CUPE provides members with a tool to measure inflation and to check if their wages are keeping up with changing prices in their region. Find it at cupe.ca/cpi-calculator.
