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Author: Nicholas Lee, Assistant Professor, Department of Economics, Toronto Metropolitan University
But how is inflation measured and where does it come from?
In June, Canadian inflation hit a 40-year high of 8.1. % reached. Although there are signs that inflation has eased, many Canadians have coped with the surging cost of living by spending less, working more to earn more, using their savings or taking on more debt.
As an economics professor doing research on prices and consumption, he offers some insight into how inflation is measured and how it affects Canadians and the economy as a whole. I think that I want to do it.
What is inflation?
Inflation is the general increase in prices, resulting in a decrease in the purchasing power of money. Most of us can sense whether inflation is high or low from our daily purchases, but the inflation rates reported in the press and discussed by policymakers are created by a small army of statisticians and data collectors. It is a specific scale that has been
Statistics Canada builds the Consumer Price Index (CPI), which is used to track inflation through a two-step process. In the first step, Statistics Canada collects over one million price quotes for virtually anything available in the country.
Prices are recorded in a variety of ways, and the frequency and location of price collection varies by item. For example, items whose prices change rapidly, such as groceries or gasoline, or whose prices fluctuate from place to place, such as rent, are more expensive than items collected once a year, such as college tuition or insurance. are also frequently collected.
In a second step, Statistics Canada aggregates these prices and weights each item's price change by its share of total consumer spending to produce a consumer price index for all items. To do. These weights are updated from time to time to reflect changes in consumer spending patterns.
The most recent update for 2021 reflects changes in pandemic-related spending, including lower weightings for food (15.75%) and transport (16.16%). , the weight is higher shelter (29.67%).
Statistics Canada and the Bank of Canada also measure "core inflation." This removes the most volatile commodities (food and energy) from the CPI to give a better picture of sluggish long-term cost pressures.
Causes of inflation.
Prices are determined by supply and demand. High inflation indicates that demand for goods and services exceeds supply across the economy.
Demand is strong due to strong job and wage growth, weak credit, pandemic-related government payments, and a shift in demand for pandemic-related household consumption goods.
The impact of the pandemic on Chinese factories, international supply chains, container shipping, trucking, and Russia's invasion of Ukraine has disrupted supplies, and the recent food and energy has led to a sharp rise in the price of world.
Inflation feels higher than it is
Many Canadians feel that prices rose by more than 8.1% last year. There are at least two reasons for this, besides Canada's specific criticism of her CPI method.
First, consumer spending is measured through surveys that capture the diversity of spending patterns in the population, but this diversity is aggregated into a single set of weights that treat each dollar of spending equally. increase. Spending patterns vary by age, income, location, household composition and preferences, and an individual's budget may bear little resemblance to the weights used for her CPI.
Second, you are more likely to notice changes in the prices of items you buy frequently, and are more likely to notice price increases than price decreases. The items that saw the most price increases last year, namely energy and food, have these characteristics, and you are less likely to notice (lower) inflation rates in furniture, appliances, education and health products that balance them.
We also pay a lot of attention to rising house prices and interest rates, especially in big cities, but the cost of owning a home in the consumer price index is a 25-year historical change in house prices (25 years) and interest rates. based on the average of (5 years) reflects the long-term financing costs of the average homeowner, not those who buy a home today.
How does inflation affect us?
When it comes to inflation, there are winners and losers. Passing cost increases onto customers can hurt businesses, but by allowing them to raise prices without customer backlash because "everyone else is doing it," other companies It can be profitable for the company.
High inflation is often, but not always, accompanied by high wage growth. Individuals with wages of zero or below inflation will be hit, but those with wages linked to inflation or able to negotiate better wages will benefit. It is indexed to inflation, but individuals like seniors using bonds are often affected by inflation.
Some asset prices respond well to inflation. Prices of homes, stocks, art, and precious metals can rise, but assets with fixed dollar values, such as cash and bonds, do not.
Inflation can make it easier to pay off debt, as long as wages and other asset prices keep up. Inflation can also benefit government finances as tax revenues increase relative to the dollar value of debt.
The current causes of inflation are irrelevant to consumers, but important to economic policy. Central banks and governments will either raise interest rates, cut spending or raise taxes to curb demand and risk a recession, or wait for supply-side inflationary pressures to ease naturally. You have to decide what to expect.
There was no major recession to end this period of high inflation (unlike the Bank of Canada's last major effort to bring inflation down), and Canada's "stagflation" Just hope to avoid it. High inflation and high unemployment plagued many economies in the late 1970s.
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Nicholas Li does not work for, consult with, own shares in, or receive funding from any company or organization that benefits from this article. schedule.
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