An Analysis of the 2019 Consumer Price Index Basket Update, Based on 2017 Expenditures

Introduction

The Consumer Price Index (CPI) is one of the most widely-known, quoted and utilized economic indicators in Canada and is of interest to a wide range of users. It can be used to compare, through time, the cost of a fixed basket of goods and services purchased by consumers. The CPI is used for economic analysis and provides insight into overall economic conditions.

As a Laspeyres-type^Note  price index, the CPI basket quantities are those of the reference period of the basket weights, which are used to estimate quantities consumed for upper level aggregation. The larger the basket weight of a given aggregate in the CPI basket, the more a price change in that aggregate will impact the all-items CPI.

Basket weights are derived primarily from household expenditures reported in Statistics Canada’s Survey of Household Spending (SHS)^Note  and are updated every two years. The January 2019 CPI marks the introduction of updated basket weights in the calculation of the index. As of its release on February 27 2019, the basket weights used in the aggregation of the CPI were updated based on consumer spending patterns from the 2017 SHS, replacing those from the 2015 SHS. In addition to updates to the classification structure of the basket, these changes enhance the quality of the CPI.

Composition of the CPI Basket

The Consumer Price Index is a weighted average of the price changes of a fixed basket of goods and services, based on the expenditures of a target population^Note  in a certain reference period. Each good or service in the basket is representative of consumer spending patterns, and price movements are assigned a basket share that is proportional to the consumption expenditure for which they account. For example, 26.92% of total consumer expenditures in scope of the CPI accounted for shelter-related goods and services. This corresponds with the 26.92% weight assigned to shelter in the 2017 CPI basket. The weights of goods and services are fixed during the life of a given basket and play an important role in determining the impact of a given item’s price change on the CPI. For instance, Canadians on average spend a much larger share of their total expenditures on gasoline than on milk. As a result, a 10% price increase in gasoline prices will have a greater impact on the all-items CPI than an equivalent increase in the price of milk^Note .

The Consumer Price Index classification of goods and services is organized according to a top-down hierarchical structure (see diagram below). At the top of the structure is the all-items CPI, which contains eight major components. Below the eight major components are intermediate level aggregates, such as owned accommodation and operation of passenger vehicles, which, along with the major components, provide insight into the sources of monthly and annual price change. There are 177 basic aggregates.^Note  These basic aggregates are typically the result of aggregating one or more elementary aggregates, many of which are unpublished.

Elementary aggregates are added or deleted from the basket as consumption patterns change over time. The aggregate for DVD rentals,^Note  for instance, was deleted from the basket as they became less popular with consumers and subsequently commanded a lower share of overall expenditures. At the elementary aggregate level, the classification includes a sample of items that are chosen to characterize all products in that class. Representative products are chosen with emphasis on items that are widely available and known to be among the most popular with consumers, ensuring that the items selected are representative of the purchases consumers actually make. The number of representative products assigned to an elementary aggregate can vary based on the basket weight of the aggregate, as well as the price variability and heterogeneity of products in that class. For instance, when pricing certain dry grocery products, representative products typically include both brand-name and store-brand items. At the same time, there is only one representative product priced under the bananas aggregate.

Importance of Updating the Consumer Price Index Basket Weights

If the fixed-quantity basket of goods and services was kept unchanged for an extensive period of time, it would gradually lose accuracy and relevance as a reflection of consumer spending. This is partly due to the nature of consumption patterns, which have a tendency to evolve in response to shifts in relative prices. For example, if the price of chicken increased between basket updates, consumers may opt away from chicken and substitute other meats. A Laspeyres-type price index cannot reflect this expenditure change until the basket weights are updated. This can lead to an overstatement of the importance of changes in the price of chicken in the index and a subsequent upward bias in the CPI. Typically, the longer a fixed set of basket weights is used, the greater this upward bias.

Consumer spending patterns are also influenced by factors such as variations in the level and distribution of household income, demographics (such as an aging population), evolving habits and technological advances. New products and services are introduced to the market and existing ones may be modified or become obsolete. As a result, the basket needs to be revised periodically to reflect changes in consumers’ spending patterns. For example, the significant increase of the basket share for Internet access services from 0.53% in 2005 to 1.06% in 2017 reflects the growing importance of the Internet in the daily lives of Canadians.^Note  In the same time period, the basket share of cigarettes fell from 1.27% to 0.82% as consumer spending patterns shifted away from cigarettes.^Note 

In addition to the review of the expenditure weights, a basket update is also an opportunity to review and update other aspects of the indices. This includes changing the CPI classification to make it more representative of consumer spending and the products and services available for purchase. It is also an opportunity to review and update the sample of prices collected, review price index estimation methodologies, and update documentation and dissemination products, although these activities are not limited to basket updates.

Overview of the 2017 Basket Update

The basket is updated periodically to reflect changes in consumer spending patterns. The continuity of the CPI series is maintained by chain linking^Note  the corresponding indices obtained from consecutive baskets. This is done separately for each aggregate series, which is defined as the intersection of a commodity and a geographic area.

With the introduction of the 2017 basket weights, new product classes were added to reflect the evolving consumption patterns of Canadians, with emphasis on incorporating services that have gained in popularity amid the increasing digitization of the economy. With respect to the rise of the sharing economy,^Note  this includes the introduction of an elementary aggregate for ride sharing. The aggregate for other traveller accommodation was expanded to include prices for online vacation property rentals. These additions reflect evolving transportation and accommodation preferences among Canadians. In the previous basket, the basic aggregate video and audio subscription services contained two elementary aggregates: broadcasting subscription services and online subscription services. With the introduction of the 2017 basket weights, the latter aggregate now contains two lower-level indices: video streaming services and audio streaming services.

Amid steadily increasing use of public transportation by Canadians in their daily commutes,^Note  an elementary aggregate for commuter trains was also introduced to the 2017 basket.

At the basic aggregate level, a number of indices were added to the 2017 basket. The alcoholic beverages and tobacco products major component has been renamed alcoholic beverages, tobacco products and recreational cannabis to reflect the consumption of recreational cannabis by Canadian consumers.^Note  Additionally, medicinal cannabis has been added as a basic aggregate under the intermediate aggregate medicinal and pharmaceutical products.

While one basic aggregate, area rugs and mats, has been deleted from the 2017 basket, the classification structure of the remaining basic aggregates remains intact. Elementary aggregates for broadband and other Internet access services, blank CDs and DVDs and portable drives were deleted from the basic aggregates Internet access services and purchase of digital media respectively.

As alternative data sources have become available, minor changes were made to the classification of the food component at lower level aggregates to better facilitate the use of scanner data.^Note  This includes the re-allocation of representative products and the introduction of new elementary aggregates. Similar changes were made in the clothing and footwear component, reducing unnecessary detail at the lowest levels of the clothing aggregate.

The index reference period or index base period is the period in which the index is set to equal 100. For the CPI, the index base period is usually a calendar year expressed as “index year=100”. The current index base period for the CPI remains 2002=100 in the 2017 basket.

Update to Basket Weights

Considerations

Between periods, the basket share for a given good or service may either increase, decrease or remain unchanged. Each potential outcome corresponds with the change in the proportion of overall expenditures (increase, decrease or no change) between the 2015 reference year and the 2017 reference year.

It is important to note, however, that expenditure share is a relative measure. Basket weight changes are a function of the expenditure growth within a given category, as well as the growth rate of all other expenditures in scope of the CPI. A basket share that is declining, for instance, indicates that the rate of growth in that category was less than the rate of growth of overall expenditures.

For the following analysis of basket weight changes, the effect of rounding on basket weights should also be taken into consideration. Given that basket weights are rounded and published at the second decimal place, minute changes in expenditure share may not be apparent. Basket share changes of smaller magnitudes are, however, accounted for in the CPI, as full-precision expenditure weights are used in its calculation.

Analysis of Basket Weights

The chart below shows the evolution from 1992^Note  to 2017 of CPI basket weights for Canada by major component. Over the past 25 years, the basket share of the transportation component has increased the most, while the respective basket shares of the food component and the alcoholic beverages, tobacco products and recreational cannabis component posted the largest declines. A consistently declining trend was observed in the latter since its weight was first published in 1986, with the basket shares for alcoholic beverages and tobacco products both steadily decreasing over time. The 2017 basket, however, recorded the first increase in the basket share of the alcoholic beverages, tobacco products and recreational cannabis component as its weight increased from 2.58% to 3.16%. This increase reflects, in part, the introduction of recreational cannabis to the CPI basket.

Shifting basket shares often result from sustained price changes, which require consumers to reallocate their expenditures. For example, the basket share of the shelter component grew the most in Ontario and British Columbia, reflecting the increasing cost of housing in Canada’s highest priced housing markets.^Note  At the national level, the basket share of mortgage interest cost has declined with every basket since 2009, reflecting the increasingly low interest rates offered by commercial banks between 2009 and 2017.^Note 

In 2017, consumers allocated a smaller share of spending to clothing and footwear, as well as several durable household goods, including furniture, audio equipment and video equipment. These declines in basket share are attributable, in part, to lower prices for these commodities in 2017 compared with 2015.^Note 

Shifting basket shares can also result from evolving social and economic factors.  For example, Canadian consumers allocated a larger share of spending to health care goods in 2017 than they did in 2005,^Note  an increase that coincided with the aging of the Canadian population.^Note  Similarly, the basket share of cigarettes continued to decline in the 2017 basket, falling to 0.82%, reflecting the changing smoking habits of Canadians.^Note 

While the basket share of food purchased from stores declined between 2015 and 2017, food purchased from restaurants grew in importance from 4.92% in the 2015 basket to 5.03% in 2017. This greater emphasis on food consumed outside the home reflects changing lifestyles and increasing preferences for quick meal solutions, as does the growth in basket share of the other food products and non-alcoholic beverages index, which includes prepackaged foods.

The operation of passenger vehicles index decreased in basket share from 9.45% in 2015 to 9.14% in 2017. Canadians allocated a smaller percentage of their budgets to gasoline in 2017, as expenditures grew more slowly between 2015 and 2017 compared with other commodities. Higher consumer prices for gasoline during the same time period were moderated by reduced growth in gasoline consumption,^Note  which contributed to a decline in basket share from 3.49% in 2015 to 3.34% in 2017. Other driving-related expenses, including passenger vehicle insurance premiums and passenger vehicle maintenance and repairs, also declined in basket share.

The importance of cellular and Internet services continued to increase in the 2017 basket, which is consistent with the increasing popularity of both technologies, particularly among older Canadians.^Note  A greater share of consumer expenditures was allocated to multipurpose digital devices, including tablets and smartphones, in 2017 than in 2015. At the same time, the basket share of newspapers continued to decline, reflecting widespread access to online digital media that provides much of the same content. Similarly, the importance of the purchase of digital media index, which includes CDs and DVDs, declined in the 2017 basket.

Conclusion

With the 2019 basket update, important changes aimed at improving the quality of the Canadian Consumer Price Index (CPI) were introduced. The contents included in the basket were updated to reflect changing consumer behaviours and ensure the CPI remains a reliable indicator of consumer price change.

Appendix

Notes