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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].
Although inflation is much feared for its negative effects on the economy, how to measure it is a matter of considerable debate that has important implications for interest rates, monetary supply, and investment and spending decisions. Underlying many of these issues is the concept of the Cost-of-Living Index (COLI) and its controversial role as the methodological foundation for the Consumer Price Index (CPI). Price Index Concepts and Measurements brings together leading experts to address the many questions involved in conceptualizing and measuring inflation. They evaluate the accuracy of COLI, a Cost-of-Goods Index, and a variety of other methodological frameworks as the bases for consumer price construction.
The consumer price index (CPI) measures the rate at which prices of consumer goods and services change over time. It is used as a key indicator of economic performance, as well as in the setting of monetary and socio-economic policy such as indexation of wages and social security benefits, purchasing power parities and inflation measures. This manual contains methodological guidelines for statistical offices and other agencies responsible for constructing and calculating CPIs, and also examines underlying economic and statistical concepts involved. Topics covered include: expenditure weights, sampling, price collection, quality adjustment, sampling, price indices calculations, errors and bias, organisation and management, dissemination, index number theory, durables and user costs.
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.