Prices Analytical Series
An Analysis of the 2022 Consumer Price Index Basket Update, Based on 2021 Expenditures

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Key messages

• Statistics Canada regularly calibrates the basket weights for the Consumer Price Index (CPI) in order to ensure the CPI remains relevant to the changing consumption and expenditure patterns of Canadians. Today’s basket weight update will ensure the relevance of the CPI as a reflection of the most recent consumer expenditure data available.
• As the country continues to face the impacts of unprecedented events, the CPI has adjusted its basket weights to reflect the relative importance of the goods and services purchased by Canadians, based on 2021 expenditures. These updates will be reflected in the May 2022 CPI release on June 22.
• Frequent basket updates are important to ensure the CPI can respond quickly to changes in consumer behaviours and preferences. Statistics Canada’s approach to basket updates is aligned with international standards and best practices, and ensures that we deliver the most up-to-date data to support social and monetary policy decisions that benefit all Canadians.

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Introduction

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

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Private and public pension programs, income tax deductions, and some government social payments are adjusted using the CPI. The index is used as a deflator of various economic aggregates to obtain estimates at constant prices. The CPI is also a tool for setting and monitoring economic policy. For example, the Bank of Canada uses the CPI and special aggregates of the CPI, among other measures, for this purpose.

As a Laspeyres-type^Note  price index, the CPI basket quantities are fixed to the reference period of the basket weights, which are used to estimate consumer expenditures 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 headline CPI.

Basket weights were derived primarily using consumer spending patterns from the 2021 national Household Final Consumption Expenditure (HFCE)^Note  series, replacing those derived from the 2020 national HFCE series. Household expenditures reported in the Survey of Household Spending (SHS) continued to be used to supplement the HFCE expenditure data,^Note  mainly providing expenditure detail at lower levels of aggregation, including geographic aggregation. Additional data sources were used to better inform expenditure weights for specific aggregates, or where HFCE or SHS data were unavailable. In other words, the updated basket weights reflect the highest quality expenditure data available, while still meeting timeliness requirements. Additional data sources include:

The May 2022 CPI, released on June 22, will mark the introduction of updated basket weights in the calculation of the index. The 2022 basket update using 2021 expenditures marks the first annual CPI basket update.

Importance of updating the basket weights

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. In order to be representative of the price change experienced by Canadians, the basket weights must be representative of how Canadians are spending their money. Typically, spending patterns change slowly and do so largely in response to shifts in prices, income levels, demographic changes, evolving habits and the availability of new technology. New products and services are introduced to the market and existing ones may be modified or become obsolete. A fixed-basket price index, such as the Canadian CPI, can only reflect changes in consumer expenditures when the CPI basket weights are updated. Under normal economic circumstances, these changes are minimized by scheduling basket updates at regular intervals.

The typically slow evolution of consumer spending patterns seen historically has required less frequent basket updates, as basket weights may have remained representative of consumer spending for longer. However, the COVID-19 pandemic was an unexpected event with large and far-reaching implications for consumer spending patterns. During this exceptional time, where consumption patterns continue to change and evolve unpredictably, including during the pandemic recovery, updating the basket more frequently to capture these changes is an important step to ensure that the CPI remains as relevant as possible. For this reason, and due to the use of more timely expenditure data, Statistics Canada has now moved to annual basket updates.

More frequent basket updates help reduce the effect of two biases which are inherent in the calculation of any consumer price index:

• The substitution bias, which occurs when consumers substitute away from more expensive goods or services to cheaper alternatives in response to changes in relative prices.
• The new goods bias, which occurs when new products or brands are not included in the CPI basket or in the CPI commodity sample and their price changes are different from the price changes of the commodities which are included in the current basket or in the current commodity sample.

While these biases are unavoidable in CPI calculation, more frequent basket updates help significantly limit their effects.

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.

Weight reference period

While consumer spending patterns changed significantly at the onset of the pandemic, some of these changes were temporary. In 2021, spending in several sectors began to gradually shift back towards pre-pandemic patterns. Spending on transportation, travel and temporary accommodations began to recover as in-person businesses and events were gradually reintroduced with steadily increasing capacity limits. As restrictions eased for in-person businesses, consumers spent more at physical retail locations^Note  as well as restaurants.^Note  While consumer spending patterns edged in the direction of pre-pandemic norms, spending patterns remained largely altered even as restrictions were gradually lifted and the economy began to recover. Many in-person businesses and events, commonly attended (and paid for) prior to the pandemic, remained unavailable or capacity-limited. Consumers continued to direct a larger share of spending towards online shopping, and remote working remained more widespread than prior to the pandemic.^Note 

Since the basket weights based on 2020 spending patterns are further away from current spending patterns, and more recent expenditure data are available, they will be replaced with weights from the 2021 reference year. While consumer spending patterns continue to evolve, the 2021 expenditure weights better reflect current consumer behaviour as Canadians approach a new normal.

Composition of CPI basket

Each good or service in the CPI 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, 29.67% of total consumer expenditures in scope of the CPI accounted for shelter-related goods and services. This corresponds with the 29.67% weight assigned to shelter in the 2021 CPI basket. The weights of goods and services 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 180 basic aggregates.^Note  These basic aggregates, such as gasoline or rent, 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 “180 basic aggregates”.
• At the fifth and lowest level of the pyramid there are “518 elementary aggregates”.

Elementary aggregates are added or deleted from the basket as consumption patterns change over time. DVD rentals,^Note  for instance, were 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^Note  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.

Table 2 in the appendix provides additional details on the CPI major components, including the basket weight at basket link month prices, the number of elementary product classes and the proportion of services (total basket weight of the elementary aggregates that correspond to services).

Overview of the 2022 basket update based on 2021 expenditures

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.

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 base year=100”. The current index base period for the all-items CPI remains 2002=100 for the 2022 basket update based on 2021 weight reference period.

The only classification change in the 2022 basket update was within the purchase of passenger vehicles index. Previously, the weight of the purchase of passenger vehicles index was comprised of household expenditures on new vehicles, plus net household expenditures on used vehicles.^Note Note  New vehicle prices were used to estimate the entirety of the purchase of passenger vehicles index, effectively using new vehicle prices as a proxy for used vehicle prices, due to the lack of sufficiently timely and granular data on used vehicle prices and characteristics. In the past, this was a reasonable proxy because price movements for used vehicles have traditionally been observed to follow similar patterns to those of new vehicles. However, amid the COVID-19 pandemic, a divergence in price movements for new and used vehicles was observed in several countries, particularly the United States. This divergence indicates that new vehicle prices no longer serve as an effective proxy for used vehicle prices in the Canadian CPI. Therefore, a new data source will be used to measure price change for passenger vehicles and to enhance the published index. Two new elementary product classes were added, purchase of new passenger vehicles (2022-04=100) and purchase of used passenger vehicles (2022-04=100). The purchase of used passenger vehicles will rely on transaction data sourced from J.D. Power and will use modelling which accounts for quality change and depreciation over time.^Note  Both index price series will be available starting April 2022 and will be published at the national level. Given the integration of new and used passenger vehicles as published series, the aggregates purchase of automobiles (2013=100) and purchase of trucks, vans and sport utility vehicles (2013=100), first published in 2018, will no longer be published.

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 2020 and 2021 reference years. A basket share that is declining, for instance, might reflect a rate of growth in that category which was less than the rate of growth of overall expenditures. For example, although spending on alcohol purchased from stores increased in 2021, the basket share for alcohol purchased from stores decreased.

Given that basket shares 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.

Statistics Canada publishes two sets of basket weights for the CPI: weights at basket reference period prices and weights at basket link month prices. Weights at basket reference period prices are calculated for each reference period separately based on expenditure shares. Weights at basket link month prices are obtained by price-updating^Note  the weights at basket reference period prices to obtain the hybrid expenditures expressed at prices of the link month.^Note  The calculation of the headline CPI is based on weights at basket link month prices, so that it is comparable over time. The following analysis focuses on weights at basket reference period prices, as this best reflects the actual change in expenditure shares between basket reference periods.

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. The information is grouped by Major Component (appearing as row headers), 2017, 2020 and 2021, calculated using % of CPI basket units of measure (appearing as column headers).

	2017	2020	2021
	% of CPI basket
Food	16.31	16.44	15.75
Shelter	26.92	29.78	29.67
Household operations, furnishings and equipment	12.98	15.21	14.84
Clothing and footwear	5.39	4.08	4.52
Transportation	19.72	15.34	16.16
Health and personal care	4.86	4.76	4.74
Recreation, education and reading	10.66	9.53	9.52
Alcoholic beverages, tobacco products and recreational cannabis	3.16	4.86	4.79
Note: 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.

Following significant changes to the 2020 basket weights compared with the previous 2017 weights,^Note  the 2021 weights saw smaller changes compared with the 2020 basket as many COVID-19 restrictions remained in effect, although to a lessening degree. Chart 1 above shows how pandemic shifts in spending behaviour were largely sustained in 2021. While expenditures increased in all eight major components, resulting basket shares grew in two major components and decreased in six, albeit very slightly in three.

Following the largest decrease of the major components in 2020 (-4.38 percentage points from 2017 to 2020), the relative weight of the transportation component increased the most of the major components in 2021, from 15.34% in 2020 to 16.16%. The other major component whose weight increased was clothing and footwear, increasing from 4.08% of the basket in 2020 to 4.52% in 2021, after the second largest decrease in 2020 (-1.31 percentage points from 2017 to 2020). After only a 0.13 percentage point increase in the last basket update, the food component weight declined by the most among the major components, from 16.44% to 15.75%, although total expenditures for food increased in 2021 compared to 2020.  The weight for household operations, furnishings and equipment fell from 15.21% to 14.84%. Following a 2.86 percentage point increase from 2017 to 2020, the largest on record for a major component, the weight for the shelter component declined modestly from 29.78% in 2020 to 29.67% in 2021. Weights for recreation, education and reading, health and personal care and alcoholic beverages, tobacco products and recreational cannabis remained nearly unchanged at 9.52%, 4.74% and 4.79% respectively.

Many of the shifts in basket weights reflect consumer behaviour inching in a direction toward pre-pandemic spending levels amid the gradual reopening of the Canadian economy, albeit with ongoing COVID-19 restrictions. All of the notable changes in the weights of the major components reversed the trends observed in 2020, reflecting a shift away from spending patterns observed in the early months of the pandemic. In 2020, essential goods and services, such as food and shelter, represented a larger share of the total expenditures. As spending recovered in 2021, this trend gradually began to reverse as the additional expenditure was directed predominantly back towards discretionary goods and services, including those which were largely unavailable for consumption in 2020, and essential goods and services therefore represented a smaller share of total spending.

As travel and COVID-19 safety measures eased, consumers directed a larger share of expenditures towards transportation, primarily due to increased expenditure on gasoline (3.47%). As businesses reopened and physical distancing restrictions were eased, Canadians began travelling more and demand for gasoline increased. Additionally, following the lows of 2020, oil prices began to rise in early 2021 as global demand picked up, contributing to higher prices and therefore higher expenditures at the pump. While gasoline drove the increase in transportation weights, weights for passenger vehicle insurance premiums (2.12%) also rose amid increased domestic travel. Despite increasing expenditures by Canadians, purchase of passenger vehicles (5.91%) represented a smaller share of total expenditure, contributing downward pressure on the weight of the transportation component.

Consumers directed a larger share of spending towards clothing in 2021 as in-person shopping began to resume, with women’s (1.46%) and men’s (0.95%) clothing accounting for most of the increase. The basket weight for jewellery (0.33%) also increased slightly amid higher prices for precious metals.

While consumers directed a smaller portion of spending towards almost all food items from grocery stores, expenditures still increased for the majority of these items, however at a slower rate than other components of the CPI. The broad-based decrease across food purchased from stores (10.93%) caused the overall decrease in the food component weight, with meat (2.12%), fresh vegetables (1.03%), dairy products (1.33%) and cereal products (0.55%) contributing. Fresh vegetables and cereal products were the only two notable food components for which expenditures decreased. Conversely, the easing of restrictions and gradual reopening of restaurants caused food purchased from restaurants to be the only noteworthy upward moderator to the food component, rising from a 4.54% basket share in 2020 to 4.82% in 2021, approaching its pre-pandemic share of 5.03% in 2017.

Household operations, furnishings and equipment declined in importance on the back of telephone services and other household services. Households spent less on telephone services, which continued to trend downward alongside prices, with a 1.50% weight in 2021, down from a 1.77% weight in 2020 and a 2.39% weight in 2017. The relative share for other household services fell to 1.57% in 2021 from 1.72% in 2020, with legal services and government services contributing.

While households dedicated a larger share of consumption to rented accommodation (6.91%), driven by the rented accommodation weight in British Columbia (8.48%), the overall weight of the shelter component decreased mainly due to owned accommodation (19.31%), with notable decreases in property taxes and other special charges (2.59%) and mortgage interest cost (3.11%). Despite higher assessed values, moderate increases in property taxes were observed through 2021 amid the pandemic, coinciding with a smaller relative basket weight for property taxes and other charges. Consumers also dedicated a smaller share of expenditure to mortgage interest cost as mortgage rates remained low through 2021 amid a historically low policy rate set by the Bank of Canada. The shelter weight decline was moderated by the weight for homeowners’ replacement cost, which rose exactly one percentage point to 6.24% amid elevated housing prices, in part due to higher construction costs and historically low interest rates.

The largest upward contributor to the relative share of the recreation, education and reading major component was toys, games (excluding video games) and hobby supplies (0.69%). Coinciding with the easing of COVID-19 restrictions, weights for use of recreational facilities and services (0.66%) as well as traveller accommodation (0.54%) also increased. Moderating the increase was travel tours (0.30%), with expenditures falling in 2021 relative to 2020, which included some months prior to the pandemic when travel was still at unrestricted pre-pandemic levels. This coincided with ongoing barriers to international travel, including mandatory quarantines, pre-entry testing requirements, vaccine mandates and travel advisories.

The relative weight of alcoholic beverages served in licensed establishments (0.69%) increased by 0.12 percentage points while the weight of alcoholic beverages purchased from stores (2.23%) fell by 0.13 percentage points.

Conclusion

Statistics Canada continues to update and enhance the CPI in order to ensure it remains the highest quality measure of price change. In the 2022 basket update, weight and classification changes, informed by the most current and relevant expenditure data available, ensure that the CPI continues to be as representative as possible of price changes faced by Canadians.

Annual basket updates allow the CPI to respond more quickly to changes in consumer behaviour. The 2022 basket update captured the evolution of consumer spending amid the gradual reopening of the economy and future basket updates will allow the CPI to continue to adjust to new economic realities. Statistics Canada continues to review CPI methods and calculation on an ongoing basis and will continue to monitor consumer expenditure patterns.

Statistics Canada continues to work with price experts, other national statistical organizations and other partners to ensure data and methods used in the calculation of the CPI are aligned with international standards and best practices. As part of the agency’s rigorous and ongoing efforts to maintain the quality and relevance of the CPI, Statistics Canada 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 accurate, robust and relevant for Canadians.

Appendix