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### The Consumer Price Index (CPI) and YOU

62-560-XWE

Jerry McKim, Statistics Canada resource teacher

Overview

By personalizing the study of the Consumer Price Index, students will understand the value of this economic indicator as

• a method of comparing prices from period to period
• a tool for adjusting wages, government transfers and other payments to reflect price inflation.

Objectives

• To understand the terminology relating to consumer price inflation in the economy
• To interpret interactive tabular data to support an argument concerning the Consumer Price Index
• To understand the effect of individual price increases on overall consumer price inflation

Suggested grade levels and subject areas

Intermediate, secondary
Economics, Geography, Mathematics, Home Economics and Family Studies, Social Studies

Duration

45 to 60 minutes

Vocabulary

The Consumer Price Index (CPI) —Think of the CPI as a measure of the percentage change over time in the average cost of a large basket of goods and services purchased by Canadians. The quantity and quality of the items in the basket are held constant. As a result, changes in the cost of the basket are due to pure price movements and not to changes in the composition of the basket.

Inflation — Inflation is referred to as the average rate of increase in prices. When economists speak of inflation as an economic problem, they generally mean a persistent increase in the general price level over a period of time, resulting in a decline in a currency's purchasing power.

When prices rise, the purchasing power of money drops. When prices drop, a dollar has more purchasing power. The inverse of the CPI is used to estimate changes in the buying power of money.

Inflation is usually measured as a percentage increase in the Consumer Price Index (CPI). If the rate of inflation is 10% a year, for example, \$50,000 worth of purchases last year will, on average, cost \$55,000 this year. At the same inflation rate, those purchases will cost \$60,500 next year, and their cost will double after only seven years.

Weighting — The process of adjusting the impact of a price change on the CPI to reflect the relative importance of the product in the overall budget of an average family.

Basket of goods — Statistics Canada surveys Canadians periodically about their usual spending on consumer goods and services. The survey results determine the contents of this 'basket of goods.' The basket is subdivided into major components such as 'Food,' 'Clothing' and 'Household expenses.' These groups are further divided into 182 basic components, each of which contains actual products. For example, toothpaste is an item in the basic component 'Oral hygiene products,' within the major component 'Health and personal care.' In total, over 600 items are regularly checked for price changes.

Materials

Classroom instructions

1. Teacher should review the publication Your Guide to the Consumer Price Index and introduce the general concepts. Use the tutorial worksheet and the Simulator to illustrate and explain these terms:
• price change
• weighting
2. Manipulate the Custom Inflation Simulator data sheet to test the hypothesis that spending changes in various categories of goods have limited impact on the overall index (weighted average change).
3. Manipulate the Custom Inflation Simulator data sheet to show that major price changes in periods of high inflation can have a serious effect on personal budget decisions.

Evaluation