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moneysense.ca, 14/07/06
High Inflation: Perception or Fact?
TD Economics has published a highly readable report on inflation titled Say it ain’t so: Canadians Don’t Believe Inflation Numbers. The report examines if the official CPI numbers accurately reflect price increases experienced by consumers and dispels some of the inflation myths.
The report’s concludes:
Despite being a broad-based measure, we can feel confident that the CPI does reflect the inflation experience of Canadian consumers. The perception that inflation is rising faster than reported by the CPI is just that – a perception, not a fact. In truth inflation has been low over the past ten years with little volatility.
moneysense.ca, 14/07/06
I can’t speak for the Canadian numbers but I have huge difficulty in accepting this conclusion.
A review of my personal expenditure (or items with which I have direct experience) shows that over the last three years shows that many items have increased at a much higher rate than the offical inflation numbers. I can identify some items that have not moved as much, some items that I am uncertain about and only two items that have gone down.
The big ticket items have gone up by a lot more than CPI. The increased cost of housing (easily our single biggest expense) is, on its own, enough to ensure that our household’s personal rate of inflation over the last 3 years is higher than the CPI numbers for the same period. Notwithstanding the limitations of my data I believe that the balance of our spending would also show increases which are higher than CPI. Even if my belief were wrong, the housing cost alone would make a mockery of the official CPI numbers.
OK, this is one household and the CPI numbers reflect the consumer population as a whole, but our personal numbers are way way higher than CPI and I would find it hard to accept that a typical middle income family which owns their own home has not experienced similar levels of personal inflation as ours.
It would also be a lot easier to accept the CPI numbers if it were not for the fact that every adjustment to the basis for calculation seems to result in CPI being adjusted downwards. The calculation has lost its credibility.
The problem is the basket of items they use to make up the CPI. It does’nt include the price of gas! I think the housing numbers are based on rental rates or something (correct me if i’m wrong). Things like conumer goods (tv’s, dvd’s etc) and clothing which come from places like China now are indeed cheaper and bring the CPI down, but who buys this stuff regularly? Not me. But i gas up regularly. I don’t think taxes are counted either, here in Hamilton they go up about 5% every year!
I don’t think anybody has ever claimed that CPI is a perfect system of measurement. Core CPI excludes food and energy mainly due to their volatility. Food prices change seasonally and is also affected by weather – crop failure = higher prices. Energy is the same way now as there is a terror premium built into oil, but not in natural gas. So, to get rid of all of this craziness, they stripped it out of the formula. That said, they also frequently have to revise numbers, so who knows – maybe two months down the road, they will have to revise our current month’s CPI upwards. Undoubtedly, our high energy prices will eventually trickle down into the CPI as the cost of manufacturing and transportation goes up – you just have to be a lot more patient to see that inflation.
It does appear that the author has taken the official CPI numbers, not the “core” CPI. The CPI is based on a basket of goods and services (reported in the Survey of Household spending) that measures everything from gas to property taxes.
Unfortunately, I can’t tell from my spending patterns how inflation is affecting our family because our consumption patterns have changed so much over the past few years.
The CPI numbers are always a bit of a question mark. Does anyone really think that they reflect what inflation is ? Not me.
As has been pointed out, they are usually revised, and do not reflect actual spending.I find that monetary growth numbers are usually a more accurate indication.
Canadain inflation is running about 8-9% based on monetary growth factors.
I think the report contains a logical fallacy. It claims that inflation is not as bad because ’substitution’ occurs. However it seems ridiculous to say that if I switch from premium beer to inexpensive beer (in their example renting vs owning), then I haven’t experienced inflation. If, because I only have a fixed amount of cash, I buy different goods and only spend the same amount of cash as before I have still experienced inflation.