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  • Writer's pictureRIHANA PEIMAN

What Is the CPI and How It Measures Inflation?

The Bank of Canada applies the consumer price index (CPI) to target inflation. In other words, CPI tracks how much the average Canadian household spends, and how that changes over time.

How Does the CPI Work?

Using a virtual shopping basket filled with about 700 goods and services that Canadians usually purchase, Statistics Canada adds up the total cost and tracks the month-to-month change in prices. Depending on how much a typical household spends on each item, a “weight" is given to each item.

For instance, more weight is given to groceries and rent than on haircuts as Canadians usually spend more on the foods and housing costs. As the result, when the price for items with a greater weight goes up, a larger effect can be considered on the average household’s cost of living. These include:

  • food

  • shelter

  • furniture

  • clothing

  • transportation

  • recreation

How Does the CPI Measure the Inflation?

The CPI is a simple and familiar measure of price changes, or inflation. The percentage change in the CPI is a measure of inflation.

  • Comparing prices from one month with those from the same month the year before through the 12-month percentage change—for example, May 2022 compared with May 2021.

  • Annual Average: the average of all the months in a calendar year, from January to December.

Does the House Prices Include as Part of Shelter Costs?

No! The CPI doesn’t capture every price and one of those is the house price. Although property taxes and homeowner’s insurance are included as part of shelter costs, house prices are not. The reason is that real estate is considered an asset, not a good or service. This can make a real difference in your cost of living Depending on where people live in Canada.

Is the CPI a Perfect Indicator of Inflation?

No! Since the evolution of the things that people buy and the way they buy them makes measuring changes in prices a challenge, it is difficult for the CPI to give a completely accurate picture of inflation.


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