Prices Analytical Series
An Analysis of the 2021 Consumer Price Index Basket Update, Based on 2020 Expenditures

Introduction

The Consumer Price Index (CPI) is one of the most widely known, cited and used economic indicators in Canada. The CPI compares, through time, the cost of a fixed basket of goods and services purchased by consumers, providing insight into overall economic conditions and consumer price inflation. It is also used for indexation and contract escalation.

Importance of updating the Consumer Price Index basket weights

Methodological approach to the 2021 basket update

Statistics Canada’s priority is to ensure the CPI remains a high quality measure of inflation and reflects the changing consumption patterns of Canadians. The previous basket, based on 2017 expenditure weights, are further away from current spending patterns. As such, the 2021 basket update uses the most recently available 2020 annual expenditure data, based on national HFCE data, in addition to data from the SHS and provincial HFCE series. Alternative sources of data for 2020 were used to account for pandemic-related expenditure shifts at more detailed levels of geography and CPI components.

In order to ensure transparency in the basket update process and consistency with international methods, Statistics Canada consulted extensively with the Price Measurement Advisory Committee (PMAC) and peer statistical institutions.

Weight reference period

The basket weights based on 2017 spending patterns no longer characterize the spending patterns of the new normal arising from the COVID-19 pandemic and will be replaced with weights from the 2020 reference year. The new basket weight reference period is the 2020 calendar year, which covers a seasonal cycle and includes pre-pandemic expenditures, initial pandemic impacts, some recovery and the emergence of new consumption patterns. This allows for the derivation of expenditure shares that are as reflective as possible of actual consumption patterns at the time of the introduction of the basket, even as the pandemic and recovery continue to evolve. Although 2020 expenditures represent an unusual period, the shifts in spending due to the pandemic may lead to more permanent changes as remote work becomes more common, consumers increasingly rely on online shopping and households direct a relatively higher share of expenditures to shelter costs. In addition, post-pandemic consumer spending patterns will take some time to stabilize, as reopening and recovery are likely to be gradual and staggered, depending on the region.

The next basket weight adjustment is planned for 2022, to account for post-pandemic spending, and to ensure continuous relevance. Going forward, Statistics Canada will move towards annual weight updates based on the most recently available household expenditure data. Improvements to the adjusted price index^{Note 4} are also underway, with the next publication planned for the end of 2021.

Incorporation of HFCE from the System of National Accounts and alternative data sources

This will be the first CPI basket update based on national HFCE data. In addition to 2020 HFCE, the most recent SHS (2019) and 2019 provincial HFCE were also incorporated into the CPI basket weights, as part of an ongoing effort to improve data quality and strengthen underlying methods. These data provide high quality provincial estimates for CPI geographical regions and are further disaggregated to CPI specific elementary aggregates by using detailed data from SHS and other alternative data for 2020.

The decision to incorporate HFCE from the System of National Accounts (SNA) as the main source of expenditure weights in the CPI was made prior to the COVID-19 pandemic, and is the result of extensive research and analysis conducted on conceptual alignment, coherence and practicality. Since the SHS, as with all household surveys, can be prone to measurement and sampling challenges, the incorporation of SNA data represents added coherence with other economic indicators, such as retail sales. However, there are important differences between SNA and SHS in terms of their coverage (Table 1).



While the SHS (2019) and SNA (HFCE from Provincial Economic Accounts, 2019) data provided a comprehensive portrait of consumer expenditures in 2019, the 2020 basket builds on this structure by incorporating HFCE national-level data from all four quarters of 2020. In addition, a wealth of survey and administrative data from Statistics Canada added insight into provincial variation within the context of the COVID-19 pandemic.

In deriving the basket weights, various data sources were integrated to ensure the best quality estimates. For example, multiple data sources were analyzed before finalizing the method for calculating provincial rent expenditures. The Starts and Completions Survey and Rental Market Survey from the Canada Mortgage and Housing Corporation was used as the basis for changes in the rental universe, while the average price movement captured by the CPI provided additional insight into the change in consumer rent expenditures. Similar consideration was applied to the weight for homeowners’ replacement cost index,^{Note 5} which was derived using self-reported SHS property values from 2019, while also factoring in SNA housing stock data. Other publicly available real estate data, including the change in the average house resale price and the change in the number of owner-occupied dwellings between 2019 and 2020, were also incorporated into the weight estimate. The housing depreciation rate remained at 1.5% as in the previous basket.

In addition to these examples, the 2021 basket update considered data from a variety of other sources, including:

Composition of the CPI basket

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 179 basic aggregates.^{Note 6} These basic aggregates are typically the result of aggregating one or more elementary aggregates, many of which are unpublished.

Description for Figure 1

The Consumer Price Index classification is organized according to a top-down hierarchical structure, depicted in a pyramid chart with five levels.

• At the first level, or the top of the pyramid, is the “All-items Consumer Price Index”.
• Below at the second level of the pyramid are the eight major components which are:
  • Food;
  • Shelter;
  • Household operations, furnishings and equipment;
  • Clothing and footwear;
  • Transportation;
  • Health and personal care;
  • Recreation, education and reading;
  • Alcohol beverages, tobacco products and recreational cannabis.
• At the third level of the pyramid there are “Intermediate level aggregations”.
• At the fourth level of the pyramid there are “179 basic aggregates”.
• At the fifth and lowest level of the pyramid there are “515 elementary aggregates”.

Elementary aggregates are added or deleted from the basket as consumption patterns change over time. The aggregate for shipping fees and local delivery fees, for instance, was added to the 2020 basket as online shopping became more popular with consumers and subsequently contributed to a growing portion 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. In contrast, there is only one representative product priced under the bananas aggregate.

Overview of the 2021 basket update based on 2020 expenditures

The continuity of the CPI series is maintained by chain linking^{Note 7} 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 2020 basket weights, new product classes were added to reflect the evolving consumption patterns of Canadians. Two new elementary aggregates were added to the basic aggregate postal and other communications services: shipping fees and local delivery fees, the latter of which includes both restaurant and grocery delivery fees. Two additional elementary aggregates were added to the basket classification structure: digital subscription service to magazines was added to the basic aggregate magazines and periodicals, while video game consoles were added to the basic aggregate video equipment.

While four basic aggregates (clothing material and notions, laundry services, dry cleaning services, other clothing services) will no longer be published, the classification structure of the existing basic aggregates remains intact. At the elementary aggregate level, 12 additional indices will no longer be published due to their low basket shares:

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 all-items CPI remains 2002=100 for the 2021 basket update based 2020 weight reference period.

Update to basket weights

Considerations

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. Between periods, the basket share for a given good or service may either increase, decrease or remain unchanged, corresponding with the change in the proportion of overall expenditures between the 2017 and 2020 reference years. 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.

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

Data table for Chart 1



Data table for Chart 1
Table summary
This table displays the results of Data table for Chart 1 2017 and 2020, calculated using percent units of measure (appearing as column headers).

	2017	2020
	percent
Food	16.31	16.44
Shelter	26.92	29.78
Household operations, furnishings and equipment	12.98	15.21
Clothing and footwear	5.39	4.08
Transportation	19.72	15.34
Health and personal care	4.86	4.76
Recreation, education and reading	10.66	9.53
Alcoholic beverages, tobacco products and recreational cannabis	3.16	4.86
Notes: Weights are expressed as proportions of total household consumption expenditures in scope of the CPI in the weight reference period dollars. Source: Statistics Canada Table 18-10-0007-01 Basket Weights of the Consumer Price Index.

With the release of the latest basket weights from 2020, there are several significant shifts in basket weights. Three of the eight major components saw unprecedented growth in their basket weights. Shelter, already the highest-weighted major component, grew the most from 2017 and now comprises 29.78% of the overall CPI basket. The household operations, furnishings and equipment component grew to 15.21% and the basket share for alcoholic beverages, tobacco products and recreational cannabis component expanded to 4.86%.

At the same time, four of the major components declined in basket share. The transportation component shrank the most, from 19.72% to 15.34%. The basket share for clothing and footwear fell from 5.39% to 4.08% and was surpassed in importance by the health and personal care (4.76%) and alcoholic beverages, tobacco products and recreational cannabis (4.86%) components for the first time. The basket share of the recreation, education and reading component also declined, from 10.66% to 9.53%.

Many of these shifts in basket weights reflect changes in consumer behaviour that emerged as a result of the COVID-19 pandemic, such as an increase in remote work, reliance on e-commerce and a reduction in international travel. While the recovery from the pandemic continues to evolve, the 2020 expenditure patterns influenced by the pandemic represent the most recent available data on how Canadians allocate their household spending. The 2020 basket weights remain relevant, given the gradual and asymmetric reopening across the country and that some structural changes to consumer behaviour are likely to remain beyond the pandemic recovery.

The growth in basket share for shelter was in large part due to widespread increases in the owned accommodation (19.46%) subcomponent. While interest rates fell at the onset of the pandemic and remained at record-low levels for the rest of the year, consumers directed a greater share of their expenditures to mortgage interest due to rising home prices and the increased number of new mortgages. As a result, the basket weight for mortgage interest cost increased from 3.30% in 2017 to 3.68% in 2020, reversing the declining trend in its basket share since 2011. The homeowners’ replacement cost edged up to 5.24% of the basket, while consumers also directed significantly more spending toward other owned accommodation expenses, including real estate commissions and legal fees, which gained in basket share from 1.96% to 4.01%. These gains reflect the active housing market toward the end of 2020, with both housing prices and residential real estate transactions reaching new highs. Offsetting these gains, two components declined in the shelter category, both utilities. The basket weight of electricity fell from 2.25% in 2017 to 1.88% in 2020, in part due to policy changes introduced by the provincial government to lower consumer electricity costs in Ontario.^{Note 8} In spite of higher prices, natural gas (0.70%) declined in basket share as households decreased their consumption of natural gas.^{Note 9}

Financial services, including bank fees and stock and bond commissions, also increased notably in basket share. The gain reflects higher household savings rates throughout most of 2020.

As Canadians spent more time at home during the pandemic, spending on household furnishings and equipment increased substantially, with its basket share climbing from 3.58% in 2017 to 5.08% in 2020.^{Note 10} Consumers directed more spending toward tools and other household equipment as they carried out home improvement projects to make their living spaces more conducive to working from and spending more time at home.^{Note 11} While gyms remained closed for extended periods of time, Canadians bought more exercise equipment and engaged in more outdoor activities,^{Note 12} directing more of their spending toward the sporting and exercise equipment component (0.50%) and purchasing and operating recreational vehicles (1.57%). Home entertainment equipment, parts and services (1.07%) and toys, games (excluding video games) and hobby supplies (0.54%) both increased in importance.^{Note 13}

The importance of alcoholic beverages (2.94%) and cigarettes (1.27%) increased in the 2020 basket. These gains reflect the incorporation of SNA data, which does not rely on self-reported spending habits and provides a more accurate estimate of consumer expenditures on alcohol, cigarettes and cannabis.^{Note 14}

Among the major components, the transportation component declined the most in basket share, mainly due to significant decreases in consumer spending related to passenger vehicles and air travel. The purchase of passenger vehicles basket share dropped from 7.60% in 2017 to 6.11% in 2020, contributing the most to this decline. A reduction in sales of new passenger vehicles in 2020^{Note 15} contributed to their reduced importance in the CPI basket. As economic activity contracted at the beginning of the pandemic, demand for gasoline and, consequently, gasoline prices, plummeted, reducing the basket weight for gasoline to 2.84% in the 2020 basket, the lowest basket share for gasoline on record. As more Canadians continue to work from home on a permanent basis, the extent to which demand for gasoline will recover is unclear. The importance of passenger vehicle insurance premiums (1.93%), fell, as did the weight of passenger vehicle maintenance and repair services (0.98%). The basket share of air transportation (0.26%) dropped to an all-time low, declining from a 1.14% basket weight in 2017. Although consumer confidence has been increasing with the vaccine rollout, consumer demand for air travel will likely return gradually, beginning with domestic air travel as international travel advisory restrictions are gradually eased. The basket weight for local and commuter transportation, which includes public transit and taxis (0.25%), also declined due to an increase in remote work, which is likely to persist in the recovery period.

The basket share for travel services declined from 2.44% in 2017 to 0.91% in 2020. There were significant declines in the basket shares of both traveller accommodation and travel tours, the result of border closures and physical distancing measures to limit the spread of COVID-19. As with air travel, consumer demand for traveller accommodation and travel tours will likely return gradually. The importance of other cultural and recreational services also decreased from 2.28% to 1.70%, as consumer expenditures directed to movie theatres, concert venues and gyms, which were shut down for extended periods of time in 2020, slowed.

Other notable declines in expenditures arose from public health measures. The basket share for food purchased from restaurants shrank from 5.03% in 2017 to 4.54% in 2020, its lowest basket share on record, reflecting periodic restrictions on in-person dining to limit the spread of COVID-19. This shift was most notable in British Columbia and Quebec, while consumers in the Atlantic region saw their share of spending on food from restaurants increase. Consumer spending on child care, including daycares, which were periodically closed (except on an emergency basis) in some regions, fell from 0.86% to 0.45%. The importance of personal care services (0.62%), such as haircuts, also declined.

The importance of clothing and footwear also declined in the 2020 basket, shrinking from 5.39% in 2017 to 4.08% in 2020 and reflecting both lower prices and a significant decline in sales.^{Note 16} In-person shopping for nonessential retail stores, including clothing stores, was suspended for part of the year in large parts of the country and retailers offered bigger discounts online amid lower demand. As more Canadians continue to work remotely post-pandemic, it is unclear whether consumer expenditures for clothing will recover to pre-pandemic consumption levels.

Conclusion

With the 2021 basket update, Statistics Canada introduced important changes aimed at improving the quality of the Canadian CPI. The most recent annual national expenditure data, for the 2020 weight reference period, were used. Other data sources were also incorporated such that the basket of goods and services was updated to reflect changing consumer behaviour.

As Canada continues to chart a path to economic recovery, Statistics Canada is updating its methods to ensure its core statistical programs, including the CPI, are accurate, timely and of the highest quality. As the pandemic subsides, the agency will continue to monitor consumer expenditure patterns during the reopening and recovery period. The next weight adjustment is planned for 2022, to account for post-pandemic spending, and to maintain relevance. Going forward, Statistics Canada will move towards annual weight updates based on the most recently available household expenditure data. Improvements to the adjusted price index are also underway, with the next publication planned towards the end of 2021.

Working with price experts, other national statistical organizations and key stakeholders ensures the data and methods used in the calculation of the CPI are aligned with international standards and best practices. Ongoing access to reliable, granular and timely expenditure information will enable Statistics Canada to pursue the development of other sought-after indicators, such as measures of inflation for different groups, household types and geography. The agency will continue to explore new potential sources of expenditure information for future basket updates, and to adopt the most appropriate methods in order to keep the CPI relevant for Canadians.

Appendix