The Consumer Price Index (CPI)

a general picture of price increases over time.

What is it?

How is it determined?

by measuring the prices of only consumer goods and services - in a “basket” of price quotations.

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samples a variety of urban and rural centres across the country.

Transportation (including repair costs) - 18.3%Transportation (including repair costs) - 18.3%

Food - 18%Food - 18%

Recreation and education (including tuition) - 10.4%Recreation and education (including tuition) - 10.4%

Household operations and furnishings - 10%Household operations and furnishings - 10%

Clothing and footwear - 6.6%Clothing and footwear - 6.6%

Alcoholic beverages and tobacco products - Alcoholic beverages and tobacco products - 4.5%4.5%

Health and personal care - 4.3%Health and personal care - 4.3%

divided into 8 categories - each assigned a weight to indicate spending influence.Shelter - 27.9%Shelter - 27.9%

Function and Uses:

measurement of measurement of inflation levelsinflation levels

Statistics series deflator - to obtain “constant dollar estimates” of income and expenses. (That (That is what a historical $ is what a historical $ value would be equal value would be equal to today).to today).

C.O.L.A. (cost of living allowance) and “indexing”C.O.L.A. (cost of living allowance) and “indexing”

What is inflation?

Two important factors

i. rising prices (of course) but this results in

ii. declining spending power of money.

Therefore sticking $100,000 in the bank for 20 years is not really a good retirement plan.

Types of Inflation1. Demand Pull

- increased aggregate demand causes the overall price of goods to rise.

We have all ready seen this many times on the basic demand graph.

2.Cost push - decreased aggregate supply due to increased costs of production.

Again we have all ready had the pleasure of seeing this many times on the basic supply graph.

Limitations/Drawbacks:

Does not reflect every household everywhere in Canada

Quality improvements of goods not measured - i.e. Quality improvements of goods not measured - i.e. may be more expensive but much better.may be more expensive but much better.

fixed weights may not apply to all consumers.fixed weights may not apply to all consumers.

no allowance for substitution in response to price no allowance for substitution in response to price changes.changes.

therefore is not always therefore is not always work as a cost of living work as a cost of living index.index.

Accommodations/Adjustments:

The CPI will often be quoted simply as itself and as the CPI excluding certain volatile or dominant items such as energy.

- this allows analysts to better understand the cause of

inflation.