Prices and price indexes

For government, businesses and individuals alike, every change in the price of a barrel of oil, a month’s rent, or even a case of beer has an impact on how we spend—and earn—our money. Statistics Canada tracks these and many other price movements using a number of key indexes.

First and foremost is the Consumer Price Index (CPI), and its impact is felt all over the economy. Wages and salaries are adjusted to reflect price changes, as are pension payments and old age security cheques.

Come tax time, the income tax brackets we find ourselves in and the deductions we can make are determined in part by the CPI. Businesses use the index to set prices and make investment decisions, while the government relies on the CPI to help set interest rates and determine transfer payments.

Keeping track of changing prices

The CPI’s importance rests on its ability to track purchasing power. Statistics Canada regularly collects 68,000 price quotes from across the country for a basket of about 600 popular consumer goods and services—everything from french fries and bus fares to tuition and Internet service—to measure price changes in the marketplace. When the overall cost of this basket rises, we experience inflation, and our purchasing power declines.

Every month, the overall price change of the basket is measured against what the basket cost in the base year of the CPI, which is currently 1992 and represented with a value of 100. By July 2000, the index had reached 114.1, meaning overall costs had grown by just over 14%. Five years later, in July 2005, the index measured 127.5—reflecting price inflation of more than 27% since 1992.

While prices in general have increased, they have not increased uniformly. The prices of goods and services Canadians buy regularly have climbed faster than the prices of items purchased rarely.

For example, the cost of daily travel has risen significantly. Filling up the family van with gas in July 2005 cost 27% more than only five years earlier, and 73% more than in 1992. Big jumps in car insurance premiums and parking fees over the same periods have also driven the cost of car ownership higher. Public commuter transportation in 2005 was nearly 60% more expensive than in 1992, and the cost of air travel has more than doubled.

The costs of transporting goods and information have generally declined relative to the cost of all goods and services over the last 50 years. And Canada’s small towns and rural areas are reaping the benefits. These declining costs make rural communities a competitive home for newer manufacturing jobs that are part of just-in-time delivery networks. However, rural areas still face challenges from increased costs of moving people into and out of rural areas.

Many home costs are rising

We are also spending more maintaining hearth and home. Although the cost of bananas and lettuce has fallen since 1992, stocking the fridge with meat, dairy and bakery products cost one-third more by 2005.

And though falling interest rates have reduced mortgage interest costs by one-tenth since 1992, homeowners have seen insurance costs rise by 76%, and monthly water, fuel and electricity bills climb 60%.

On the other hand, our purchasing power for items we buy less frequently—many big-ticket items in particular—has actually increased. Since 2000, prices have dropped for durable goods by 4%, and for semi-durable goods by 2.4%. Declining technology costs have lowered prices for computers, home entertainment equipment and appliances, and furniture prices have barely moved.

And, due to cheaper clothing and footwear imported from China and other developing economies, the cost of dressing up in 2005 declined about 4% since 2000, and was effectively unchanged from 1992.

While the CPI is the most widely-used price index, Statistics Canada also maintains specialized indexes such as the Raw Materials Price Index (RMPI), the Industrial Product Price Index (IPPI), the New Housing Price Index (NHPI) and the Farm Product Price Index (FPPI) to help business and industry track and forecast price trends.

Manufacturers paying more for many raw materials

The RMPI tracks price changes for raw materials purchased by Canadian factories for further processing, such as crude oil, mined metals and wood. In June 2005, the RMPI stood at 145.4, meaning that manufacturers were paying 45% more for raw materials than in the base year of 1997. However, a 145% increase in the cost of mineral fuels alone accounts for much of this rise. Wood prices, on the other hand, have fallen by 25%, while prices for vegetable products are down nearly 20%.

The IPPI—which tracks the prices manufacturers receive for the goods they produce with those raw materials—climbed 11% from 1997 to 2005. Here again, much of the increase stems from the near-doubling of prices for products created with crude oil. While prices for chemical, tobacco and metal products have climbed considerably since 1997, prices for textiles, lumber and motor vehicles have fallen.

Interestingly, although the cost of wood and lumber products has fallen since 1997, the NHPI shows a steady rise in the selling prices of new residential properties. Fuelled in part by lower mortgage interest rates and demand in a hot housing market, the price of a brand new home rose by nearly 25% from 1997 to 2004.

The FPPI measures the change through time in the prices received for various agricultural commodities. At the end of 2004, the FPPI stood at 94.8, meaning that it had fallen 5.2% since the base year of 1997. The price of crops has especially been on the decline, with the FPPI for total crops in late 2005 dipping below 80 for the first time since 1993. The FPPI for livestock and animal products, on the other hand, was consistently above 100 throughout 2005 after dipping in 2003 with the bovine spongiform encephalopathy (BSE) crisis. In the first half of 2003, the FPPI for cattle and calves fell by more than 50% from 127.7 in January to a low of 63.2 in July.