cpi and inflation. what is cpi? consumer price index measures rise & fall of prices of consumer...
TRANSCRIPT
CPI and Inflation
What is CPI?Consumer Price Index
Measures rise & fall of prices of consumer goods and services
Examines average prices of g/s purchased by typical urban Canadian household
What goods do you believe would you believe are included?
What is CPI?Think of a or of
products
As the prices in the basket go up, so does CPI
Calculated monthly in 64 Canadian cities , with approximately 600 items in the basket or cart
Weights •Some items are given more importance – they are weighted•E.g. The cost of vs.
•A 10% rise in the cost of gasoline has more impact on our economy than a 10% rise in the cost of broccoli (cross category)
We can also examine weights within a category
Example: a 5% increase in the price of Farmers milk impacts us more than a 5% increase in the price of King Cole TeaPeople spend more, on average, on milkMilk is weighted at 0.69 and tea at 0.06
in the foods category
Weights
Weights 2002 Item Weight
•Shelter•Household Ops. & Furnishings
Total Shelter/Housing
26.62%11.1%
37.72%
Transportation 19.88%
Food 17.04%
Recreation/Education/Reading
12.02%
Clothing and Footwear 5.36%
Alcohol & Tobacco 3.07%
Health and Personal Care 4.73%
TOTAL 100.0%
Items in the Shopping CartEach category in the previous slide has dozens of individual g/s within
ACTIVITY - Get into pairs and come up with several g/s that could be included in each category
E.g. Food – flour, milk, meat, etc.
Income taxCharitable donationsPension contributionsConsumer savings and investments
Even though these are areas that many Canadians direct their hard earned income toward, they are seen as PERSONAL – there is no typical scenario
Items NOT in the Shopping Cart
Price CollectionPrices for shopping cart items are
collected monthly for most itemsQuarterly – haircuts, dry-cleaningAnnualy – property tax, tuition
The frequency of price changes for consumer g/s dictated the frequency of price collection
IndexingCPI is NOT measured in terms of dollars and centsIt examines how much the cost of g/s changes from
the BASE YEAR to the next (current base year is 1992!)
Example: Base year index is 100.0, the next year is 104.3. The index is 4.3% higher OR the cost of g/s in the shopping cart is 4.3% higher
This is an indicator of INFLATION – as CPI rises or falls, it indicates inflation may be rising or falling
COLA
Not True Cost of LivingCPI measures the prices of
CONSTANT g/s – they do not changeDoes not allow for the fact that
consumers adjust their spending habits (substitute goods, alternate goods) as prices rise or fall
Average representationQuality changes – CPI deals with pure
price changes, not product quality
CPI Affects…CPI affects three major areas of Canadian
economic well-being:1.OAS, CPP, Social Welfare Payments2.Rental agreements, spousal/child support,
other contractual and price-setting agreements
3.COLA – some clauses link wage increases to CPI Increase wages the same % as CPI
increase
Purchasing PowerAllows us to examine how far our dollar goes
compared to prior periodsExample: How much money in March of 2010 has
the same purchasing power as $2500 in 1986?
Index 1986: 104.92Index 2010: 149.64(149.64 104.92 ) X 2500 = $3565.67
What would happen if you did the inverse?