Economy Lab

Canadians should demand a debate on CPI changes

The Globe and Mail


Toby Sanger is senior economist at the Canadian Union of Public Employees

The Globe and Mail has revealed that Statistics Canada has been quietly planning changes to the way it calculates its Consumer Price Index measure of inflation: something I warned about a year ago.

The technical details of these changes may only seem of interest to the pocket protector and calculator crowd, but the reality is they will affect all Canadians: from pensioners and hardhats to those wearing pinstripes.

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The consumer price index is the single most important economic measure Statistics Canada produces. Hundreds of billions of dollars of pension payments, tax deductions, payments and credits are explicitly indexed to it in legislation and most workers wages are implicitly linked to it. Changes of a fraction of a per cent in the measurement of CPI could mean billions of dollars in annual savings for governments on one hand and lower incomes for pensioners, workers and taxpayers on the other.

The Bank of Canada estimated the CPI overstates inflation by 0.6 per cent a year because changes in the index don’t adjust as fast as consumers do to lower prices for goods or for improvements in quality of new goods.

The impact may be relatively small initially, but it cumulates rapidly. For instance, a 0.6 percentage point reduction in Old Age Security payments would save the federal government $210-million in the first year, but almost $3-billion annually in ten years. Increased revenues from a 0.6 per cent lower increase in the basic personal amount for taxes would increase the federal government’s revenues by $180-million in the first year, but more than $2.5-billion annually in ten years. These are just two of the dozens of federal tax thresholds, deductions and credits that would be affected.

For a worker with a starting income of $50,000 a year, a 0.6 per cent lower wage increase each year ads up to a cumulative loss of $18,000 over ten years.

There are legitimate arguments why CPI overstates inflation -- and certainly better measures of inflation should be welcomed. However, there are also many reasons why the CPI understates changes in the cost of living, but these are often ignored by those advocating changes.

For instance Canada’s CPI uses a new house price index for housing costs, which has increased at half the rate of resale homes. It doesn’t account for faster depreciation and technological obsolescence of most goods, such as computers and cell phones. Nor does it account for increased commuting times, reduced public services, increased environmental costs or quality of life factors. All these factors affect the real cost of living and should also be accounted for in changes to the CPI.

When the United States made major changes to its CPI in the 1990s, the Senate appointed the Boskin Commission to examine it. Despite the shortcomings of its report, at least there was public debate and discussion. Instead of unilaterally making changes behind closed doors, Ottawa should refer the issue to a public commission. Canadians deserve no less.