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The consumer price index (CPI) is the most commonly used measure of inflation in Canada. As an indicator of changes in the cost of living, however, the CPI is subject to various types of measurement bias. The author updates previous Bank of Canada estimates of the bias in the Canadian CPI by examining four different sources of potential bias. He finds that the total measurement bias has increased only slightly in recent years to 0.6 percentage points per year, and is low when compared with other countries.
"The Consumer Price Index (CPI) is the most commonly used measure of inflation in Canada. The CPI is used to make cost-of-living adjustments in wages and salaries and to index the income tax system and social benefits such as pensions. So it is important that the CPI be as accurate a measure of inflation as possible"--Page [1].
This paper surveys the empirical literature on the benefits of low inflation, emphasizing contributions since 1990. It follows a framework that examines the costs of inflation, or the benefits of price stability, in the context of four themes: inflation creates uncertainty about the future; there are costs of having to cope with inflation; inflation affects equity and fairness; and living with inflation is no answer. The section on each theme begins with a brief summary of points raised in the Bank of Canada's 1990 annual report, where that framework was presented. The empirical literature is reviewed extensively enough to establish a context. This is followed by discussion of those benefits of low inflation that have been quantified in the literature and those that have not; how the literature on the issue has advanced since 1990; and what areas might benefit from more research in the future.
Rising consumer prices may reflect shifts by consumers to new higher-priced products, mostly for durable and semi-durable goods. The author applies Bils' (2009) methodology to newly available Canadian consumer price data for non-shelter goods and services to estimate how price increases can be divided between quality growth and price inflation. Author evaluates impact of quality on price and concludes that quality bias is not an important source of potential mismeasurement of CPI inflation in Canada.
The official CPI may mismeasure the cost of living for different groups of people. This paper investigates the factors that might explain the size of the CPI bias measured by Emery and Guo (2019) for the years 1999 to 2015. We apply the partial least squares method (PLS) estimates of CPI bias for 10 provinces and 14 sub-groups to determine which subcomponents of the CPI are influential on the CPI bias. The result shows that gasoline, fuel and clothing are important factors affecting the CPI bias of each group. However, when we group the samples in 2010 as the cutoff point, this effect is more significant in the later stage, while the influence factors of each group in the early stage have a large inter-group difference and the exchange rate has an important impact on the CPI bias of each group, especially in the later stage.
Rising consumer prices may reflect shifts by consumers to new higher-priced products, mostly for durable and semi-durable goods. The author applies Bils' (2009) methodology to newly available Canadian consumer price data for non-shelter goods and services to estimate how price increases can be divided between quality growth and price inflation. Author evaluates impact of quality on price and concludes that quality bias is not an important source of potential mismeasurement of CPI inflation in Canada.