The Consumer Price Index (CPI) is important to workers because it is often used to determine wage increases in collective agreements, pension indexing, and increases in the value of income supports such as the Canada Child Benefit (CCB) or Guaranteed Income Supplement (GIS).

CPI is not a cost-of-living index, but it is often used to approximate one. A cost-of-living index would give us the changing cost of meeting a specific standard of living, where CPI measures price changes in the average basket of goods and services that Canadians actually purchase. This difference might seem unimportant, but it’s one of the reasons why CPI doesn’t reflect the real increases in costs in some of our household budgets.

The CPI basket has nearly 200 basic categories of items that people consume, and data from Statistics Canada’s Survey of Household Spending is used to estimate the average amount that households spend in each category. The index tracks eight broad areas of spending, and each of these areas is assigned a weight based on its proportion of the average household’s spending.

The CPI gives us the relative importance of price increases on specific items for the average Canadian, but it may not be reflective of an individual’s situation. Lower income households will spend a much greater share of their income on necessities like shelter, food, and transportation, and so price changes for these items have greater impact on their overall cost of living. At different stages of life, families may spend a greater share of their budget on child care, tuition, or recreation, making changes in those prices relatively more important. Those with specific health care needs may be required to devote a substantial share of their budget to meet those needs, leaving little left over to accommodate price increases in any other category.

If we look at how different elements of CPI have changed over time, we can get a sense why reports of low inflation don’t make sense to some of us. Over the past 10 years, the cost of shelter, food, and public transit have all increased faster than the overall price index. User fees for water continue to steadily increase – a small component of the average household’s budget, but an important trend to note for those with fixed incomes.

CPI doesn’t just measure prices; it tries to measure value as well. If the price of an item has increased partly because of new features that increase its value to a consumer, Statistics Canada makes an adjustment to take this into account. This is common for new vehicles and electronics, but it can be hard to find low-cost options without all the new bells and whistles. If an item’s price remained the same, but its quality had decreased over time, an adjustment would be made to take this into account as well. This type of quality reduction is difficult to measure and is usually only caught when the size of an item is decreased – for example if juice makers reduced their containers from 1L to 900 mL, but charged the same price.

It can also take some time for changes in consumption patterns to make it into the CPI basket, since it is only updated once every two years. The current basket elements and weights were released in 2019 and are based on data from 2017. As an example of how the basket elements change over time, this edition of the basket started including the prices of ride-sharing services and cannabis and stopped including the cost of DVD rentals. Changes in household spending habits because of COVID-19 will make estimating CPI challenging for the near future, as we learn what changes were temporary, and what adjustments may be more permanent.