In January, Canada’s Consumer Price Index (CPI) rose 5.1%, the fastest annual increase in over three decades. This is worrying, but what is even more concerning to us, here at Generation Squeeze, is that the true rate of inflation is much higher than this CPI reading suggests.
Last time, we discussed how CPI, as constructed by Statistics Canada (StatsCan), does a poor job at representing inflation because it doesn’t adequately respond to changes in home values. We saw clear evidence of this over the course of 2021, when home prices rose by 21%, far outpacing the rate of inflation suggested by CPI.
Along with colleagues from the Business Council of British Columbia and The Conference Board of Canada, we recently brought our concerns about inflation measurement to a group of StatsCan officials. We were disappointed that they suggested they have limited appetite to improve the way housing prices are captured, despite the collateral damage being caused to affordability.
StatsCan offered the following rationale for maintaining the status quo.
First, CPI is meant to capture the prices that an average Canadian pays for a common basket of consumer goods and services. It doesn't represent perfectly what each individual consumes - including costs incurred in the housing market. So, we shouldn’t be surprised that some people don’t think that CPI is doing a good job at reflecting their experience.
There is some validity to this. A good inflation gauge needs to reflect the inflation everyone is facing, but everyone endures a different rate of inflation because we all buy different things. Rising meat prices need to be tracked, which might not affect a vegetarian. Changes in car prices should be included, but aren’t relevant to a city-dweller who walks everywhere.
Still, we can’t simply dismiss how far inflation (as measured by CPI) is from the reality so many people are facing, particularly when it comes to large costs, like rent or a mortgage. StatsCan doesn’t directly incorporate home prices into the CPI calculation. '[W]e don’t consider a house a consumer good,” said Heidi Ertl, director of the consumer-prices division at StatsCan. “We consider it an asset.”' This means that the biggest expense most Canadians face in their lifetime - the acquisition of a home - is largely ignored by CPI. When rising prices are pushing homeownership out of reach for a growing number of Canadians, it’s inadequate that we are using an inflation indicator that doesn’t account for this.
The second rationale offered by StatsCan is that CPI is not intended to be a stand-alone tool to assess inflation. It is just one part of the equation. There’s no need to change CPI itself - people just need to interpret CPI data alongside other data.
It’s true that CPI shouldn’t be expected to tell the whole inflation story, but the fact of the matter is that CPI and inflation are considered to be one and the same in practice. The Government adjusts fixed payments (like pensions) according to CPI. Companies will oftentimes adjust wages similarly. The Bank of Canada defines its inflation target using CPI. The media uses CPI interchangeably with inflation. Even StatsCan equates the two. CPI is, in effect, synonymous with inflation. So it’s problematic that StatsCan doesn’t seem all that concerned about the poor job its principal measure is doing to reflect the loss of purchasing power many Canadians are experiencing due to skyrocketing home prices.
Some rough calculations tell us that in 2010, an average-sized mortgage, at an average interest rate, for a family with median earnings, would cost this family about 26% of their monthly income. Today, this has risen to about 39% of their monthly income. At the same time, CPI suggests that, on average, we have gotten wealthier - with inflation-adjusted wages rising by nearly 10% over the last decade. What good is an inflation barometer that tells us we are getting richer when the experiences of so many tell the opposite story?
We need a better inflation measure from StatsCan. The reasons they offer for sticking with the status quo aren’t good enough, given the risks and harm created by incorrect signals on housing price inflation. We need to account for the housing cost increases all Canadians are facing - including those trying to get into an increasingly unaffordable market, not just those lucky enough to already own a home.
Gen Squeeze and partners are planning to continue efforts to engage with StatsCan. While they don’t see a need for immediate action, they have expressed interest in further research to explore this issue, which is a good first step. Government of Canada Finance Committee MPs also have recently started studying this issue, which will hopefully add some additional pressure for action.
For Gen Squeeze’s recommendations on better measuring housing price inflation, check out our recently released report.