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Prices and price indexes

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Everybody loves a deal, and when it comes to spending our hard-earned dollars, we sometimes go to great lengths to find the best price possible. Whether driving from one gas station to the next seeking a half-cent discount on a litre of unleaded, browsing online ‘e-tailers,’ or waiting for the big sales, Canadians make many of their purchasing decisions based on price. And for virtually every good and service that we buy, Statistics Canada has a tool for tracking its price.

These tools include price indexes that track very specific goods and services, such as machinery and equipment, new housing, couriers and messengers, exports and imports, farm products and commercial software. These very specific indexes are used by companies and industry analysts to make business decisions, to set prices and to negotiate contracts.

The price-tracking toolbox also contains more general price indexes that measure prices for goods and services that average Canadians buy regularly. The most widely used of these is the Consumer Price Index (CPI), which tracks the cost of a ‘basket’ of goods and services bought by Canadian consumers.

The Consumer Price Index

The CPI was introduced in the early 1900s. Its basket then included 29 food items, 5 fuel and lighting items, and the cost of rent in some 60 cities. Today, the CPI reflects prices for virtually every single good and service Canadians can buy, right across the country.

Since the early 1900s, prices have gone up dramatically. Using average price increases as measured by the CPI and 1992 dollars as the benchmark, a $3.00 carton of orange juice cost roughly $0.22 in 1914, about $0.33 in 1945, and $0.78 in 1972.

This gradual rise in prices picked up steam over the 1970s, so that just 10 years later, in 1982, that same carton of juice cost $1.96. Strong price growth continued until about 1992, but slowed thereafter. In 2006, that $3.00 carton cost $3.90. This persistent rise in prices is called inflation, and the primary tool for measuring it is the CPI.

What the CPI’s major components show

The CPI measures the average change in retail prices encountered by all consumers in Canada—no one consumer buys all of the goods and services included in the CPI’s basket. Moreover, items in the CPI are weighted to account for typical spending patterns (for example, food accounts for 17% of spending) and how often consumers buy certain items (appliances are replaced only rarely). The CPI is also continually updated to be as comprehensive and representative as possible.

In January 2007, the All-items CPI was at 130.3, compared with 1992. This means that the cost of the basket of goods and services bought by Canadians has risen 30% since 1992. Shelter costs, the single largest component of the CPI and comprising nearly 27% of all spending, rose at the same rate.

However, the prices of other major com-ponents have increased much faster since 1992. Transportation costs have jumped more than 50% and food prices are up about 33%, while recreation, education and reading costs have increased just 25%. Generally, the prices of services have climbed much faster than the prices of goods. Only one major component of the CPI has actually seen prices fall—clothing and footwear is 1% cheaper today than in 1992.

The component showing the greatest price increase has been energy—from 1992 to January 2007, it climbed 62%. But, as anyone with a car knows, the price of fuel can swing wildly from one month to the next. In 2006 alone, the price of a litre of regular unleaded at full-service stations in Vancouver saw a high of $1.19 in May and a low of $0.91 in February.

The prices of fuel and items such as fruits, vegetables, mortgage interest costs and inter-city transportation, are highly volatile. To account for this, Statistics Canada measures data for different CPI baskets, such as the ‘All-items CPI excluding food and energy,’ and the ‘Core CPI,’ which exclude the CPI’s eight most volatile components.

Price changes can vary widely across the country

The CPI is also compiled for Canada’s provinces and some major cities. Price changes can vary quite widely across the country. On the CPI scale, most provinces fit nicely in the middle, having a CPI that ranges from 128 to 132.

Even Ontario and British Columbia—long regarded as the most expensive parts of the country—fit in this range. But the exceptions are notable. Alberta, at 142.4, has seen prices rise the most since 1992. By contrast, prices have grown the least in Quebec, at 125.7.

The price indexes for Canada’s major urban centres may make you think twice before taking that job in Calgary, Edmonton or Regina, where prices have risen faster than all other Canadian cities. Since 1992, shelter costs alone in Calgary have risen 71%, compared with the national average of 31%. At the other end of the scale, prices for rented and owned accommodation have moved little since 1992 in Thunder Bay.