Consumer Price Index

Federal Government’s Main Goals One of the federal government’s main goals has been to maintain price stability. If the price of goods and services rise your income should rise by the same percent. If prices rise but your income does not you cannot purchase the same amount of items that were once able to.

Inflation The term inflation is used to describe the persistent rise in prices and income over time. Every year prices tend to increase a little. This can be due to many factors – example: demand for certain products increase so the producer increases the price.

CPI Statics Canada measures the Consumer Price Index so they can track inflation. The CPI is a price index that measures the change in the prices of consumer goods. They use a “representative basket” of goods and services to do this (since it would be nearly impossible to keep track of the prices of every single product sold. This representative basket contains over 600 goods and services. They track the spending habits of households in Canada to see how much of each of the items in the basket they purchase.

CPI We use the CPI to calculate inflation by: Inflation rate = [(CPI year 2 – CPI year 1)/CPI year 1] x 100 Example: In September 200 the CPI was and in September 2001 it had risen to Find the inflation rate. Answer: 2.6%

Inflation This tells us that between 2000 and 2001 prices rose 2.6 per cent. It is important to know this especially when it comes time to look at giving raises. If you expect people to continue to work for you, you must give them a raise so that they can continue to live at least at the same standard as they are currently.

Problems with the CPI: While they the items in the “basket” are reflective of what they average Canadian household spends their money on not everyone spends their money in the same way. Some people might not spend any money on alcohol and tobacco so when the prices of these items rise there is no effect on this household.

Problems with the CPI: Also, the “typical household” is four people, however there are many households in Canada that are have more or less – resulting in spending more or less money on items like food and clothes. Another problem is that the quality of items in the basket can change over time (example: computers – they have become less expensive so the percentage of income they took up will not be less than before). Also, culture is an area of concern where consumption patterns can be different than they “norm”.