Lecture 9: Measuring Inflation

Key Concepts

• CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• GDP Deflator: A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Mechanism of CPI Measurement

• Data Collection: Every month, Statistics Canada's price checkers gather data on the prices of typical consumer items (a basket of consumer goods) across different regions in Canada.
• Regional Variations: Prices vary between locations, e.g., Montreal vs. Yellowknife, and between types of stores, e.g., supermarkets vs. corner stores.
• Calculation Example:
  • December 2017: Basket cost = $300 (Base year, CPI = 100)
  • December 2018: Basket cost = $342 (CPI = 114)
  • December 2019: Basket cost = $371 (CPI ≈ 124)
  • Inflation Rate:
    • 14% from Dec 2017 to Dec 2018
    • 9% from Dec 2018 to Dec 2019

Understanding CPI and Inflation Rates

• Base Year Concept: The base year is used as a reference point for comparison. For example, the base year 2017 is used in the calculation examples.
• Fictitious Data Used: Illustrative numbers are used to explain the concept.
• Real Data Example: In Canada, CPI for January 2020 was 136.7 with 2002 as the base year.

Important Points

1. Grocery List Composition:

   • Includes items like electricity, rent, haircuts, etc.
   • Reflects average household spending proportions across Canada.

2. Types of Goods:

   • Categorized by Engel Curves and Maslow's hierarchy of needs.
   • Distinction among luxury/superior goods, normal goods, and inferior goods.

3. New Products and Quality Changes:

   • The list evolves with new products and changes in quality, impacting CPI accuracy.

4. Consumer Behavior and Price Variation:

   • Consumers adjust purchases based on price changes, often finding lower prices than those recorded by Statistics Canada.

Conclusion

Understanding CPI is crucial for measuring inflation and understanding economic conditions. The complexities involved include variations in regional pricing, changes in consumer behavior, and the need to update the basket of goods to reflect current market conditions.