It used to be said that a penny saved was a penny earned, but rising prices helped drive the penny out years ago, and with inflation now running over seven percent, it’s eating up every penny.
So while inflation is clearly occurring, accurately capturing all price changes in the Canadian economy in a single number is much less straightforward.
“It’s a very, very difficult concept to measure, particularly in more or less real time,” said Derek Holt, head of capital markets at Scotiabank.
Getting the inflation number right is important because so much is based on it, including Bank of Canada rate decisions and cost-of-living adjustments for pensions and some social payments, as well as being widely used as a benchmark for salaries, rent and child support payments.
There have been numerous method changes to make it more accurate since the government began tracking inflation in 1914 when war in Europe, record immigration, and land speculation were driving up prices, but the data still attracts a fair amount of interest. skepticism.
The Bank of Canada and others have noted that Canadians often think inflation, as measured by the consumer price index (CPI), is higher than official data, but it’s not just average consumers who find it hard to trust. the numbers.
Holt wrote a report in December about the “false data” that Statistics Canada was providing for its inflation rate that is “riddled with uncertainties," while businessman-turned-blogger Frank Giustra wrote in a Toronto Star column in January about the “fantasy math” of US inflation data produced by an agency using “deliberate obfuscation” to keep the number low. .
The Bank of Canada relies so heavily on the data that it reviews periodically to try to gauge for itself how accurate the number is, and the most recent answer, going back nearly a decade, is that the CPI probably overstates inflation by about 0.5 percent.
The sources of the potential error in creating the number point to how difficult it is to keep abreast of price increases faced by the average consumer.
A key source of error is the substitution effect, where consumers will switch products when their usual choice becomes too expensive, such as sirloin to ground beef. The IPC will continue to measure how much the price of sirloin has changed, but the buyer has already moved.
The list of more than 500 goods and services that Statistics Canada tracks remains fixed from month to month so there can be a clear comparison of products, said Taylor Mitchell, chief economist at the federal agency.
“We just compare, month to month, similar products and make sure they really are similar."
That includes correcting product weights and quantities to account for any shrinkage inflation, he said.
To minimize the problem of changing consumer habits, which have changed especially quickly during the pandemic, Statistics Canada has moved to update its list of products every year. The change, which came into effect with May’s 7.7 percent inflation reading, also allows the agency to update how much each product influences the total number, with the things people spend the most on having a bigger effect. .
Statistics Canada also used to collect about half of the 93,000 prices it collects monthly in person, but the pandemic helped accelerate the shift toward using receipt data provided by retailers, as well as more prices obtained online and by phone. . The increased data helps the agency know which products are the most popular, Mitchell said.
“That’s really the goal, to identify the products that consumers actually buy.”
Over the years, that has meant removing items like anvils, charcoal, canned strawberries and DVD rentals from the list (although bowling fees have still been dropped), while adding electricity, cars and cannabis.
Other sources of potential error may be more difficult to fix, such as how much quality changes need to be accounted for.
While it’s complicated, especially for things like computers and cars, there are established ways to do it, said Elizabeth Abraham, chief economist at Statistics Canada’s consumer prices division.
“These are the standards that apply in all statistical agencies in the world.”
But even with standards there is room for interpretation.
A key criticism from Holt was that Statistics Canada was not separately measuring used vehicle prices that had skyrocketed during the pandemic.
Starting in May, the agency began adding them, but Holt noted that he is using data from JD Power that showed used car prices were up about 25 percent in March from a year earlier, while Blackbook calculated which increased by 39 percent. Statistics Canada also decided to use a broader car age than the US, and gave them less influence on the overall inflation number than the US.
How Statistics Canada decides how to make sure to compare similar used vehicles in terms of quality also remains a “black box,” Holt said.
“No one outside of the agency can judge how they did it.”
Canada also treats housing differently from the US, he said, as the US calculates how much a homeowner would have to spend to rent their home, while Statistics Canada tries to calculate how much it costs to maintain a home.
Because it is trying to measure consumption, the agency does not take into account price increases for homes that are considered an investment, but it does take into account mortgage interest costs, as well as the price of latex caulking tubes. .
“There will always be these multiple questions about methodological differences, even between countries with basic standards,” Holt said.
But while there will always be some margin of error in the measurement, consumers’ perception that inflation is misplaced could be attributed to a much simpler answer, which is that the consumer price index is trying to capture what the average Canadian will see, he said. Mitchell.
“Individual experiences will always vary.”
This report from The Canadian Press was first published on July 15, 2022.