Finance

Housing, alcohol and weed: Canadians’ pandemic spending habits are changing how inflation is measured

Overhaul could bolster confidence in a number some say has little relationship with everyday life

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Statistics Canada has overhauled the basket of goods and services that it uses to measure inflation, reflecting the extent to which the pandemic and lockdowns have shifted Canadians’ spending habits.

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Among the new entries on the list of roughly 700 items that comprise the Consumer Price Index (CPI) basket are video-game consoles and delivery fees, symbols of a year spent hunkered down at home, as Canadians sought to escape boredom on their screens and by ordering stuff online.

Gone from the basket: contact lenses, hair care products and perfume.

“The COVID-19 pandemic has had an undeniable impact on the way Canadians spend their money, and capturing these shifts in purchasing patterns is critical to ensure that the CPI reflects the price change experienced by Canadians,” the July 21 report said.

The CPI might be the most important number that Statistics Canada generates. The Bank of Canada relies on it to set interest rates, governments use it to determine benefits, and companies and unions lean on it when negotiating wages.

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A reworking of the basket could bolster confidence in a number that some say has little relationship with everyday life. The Bank of Canada encountered significant doubt about the CPI when conducting survey research in 2020, a worry because skepticism about the way officials measure inflation could dent confidence in the central bank’s ability to keep inflation under control.

The CPI was already getting stale ahead of the pandemic, as it hadn’t been updated since 2017. The unique economic circumstances of the past year only exaggerated the need for an update, as the line items of Canadians shifted dramatically in real time. The transportation component, for example, made up nearly a fifth of the basket pre-COVID but now comprises 15 per cent of the basket. That’s because stay-at-home orders and travel nixed the need for vacations and commutes.

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Meanwhile, the shelter segment grew significantly from 27 per cent of the basket in 2017 to 30 per cent — a reflection of the red-hot housing market in which Canadians flocked to the suburbs to scoop up extra space. The weight for mortgage interest grew from 3.3 per cent to 3.68 per cent.

“While interest rates fell at the onset of the pandemic and remained at record-low levels for the rest of the year, consumers directed a greater share of their expenditures to mortgage interest due to rising home prices and the increased number of new mortgages,” the report read.

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Canadians also dedicated more time to home refurnishing and improvements, and thus, the weighting for that section of the basket grew from 3.6 per cent to more than five per cent. As well, they spent more on alcohol, cigarettes and cannabis, which warranted re-weighting of that category from just over three per cent to close to five per cent.

The new CPI basket will come into effect with the release of June inflation data on July 28.

The Canadian basket’s reconfiguration follows the release last week of U.S. inflation data, which revealed the consumer price index shot up 5.4 per cent in June. The eye-watering figure stoked fears stateside that inflation was running too hot alongside the economic recovery and could in fact hamper it. Those worries have crept north across the border, with some concerned that inflation in Canada could go the way of the U.S.

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Housing, alcohol and weed: Canadians' pandemic spending habits are changing how inflation is measured

At the same time, the Bank of Canada released its quarterly monetary policy report which indicated it will let inflation run ahead of the central bank’s two-per-cent target through 2023 as Governor Tiff Macklem awaits a complete economic recovery.

“In Canada, we still have some way to go to a complete recovery and the rebound in economic activity will proceed at different speeds across different sectors,” Macklem told reporters. “The process of reopening the economy, it’s not going to be entirely smooth.”

However, Sri Thanabalasingam, a senior economist at Toronto Dominion Bank, said Canadians need not worry about spillover inflation from the south due to the different circumstances of economic recovery.

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“Reopening and supply constraints have led to rapid price increases in the U.S. raising concerns that Canada is bound to a similar fate,” Thanabalasingam wrote in a July 13 note. “Price pressures will certainly rise in the north as restrictions are lifted but reaching U.S. levels is unlikely. Over a longer horizon, as transitory impacts fade, we expect inflation in both countries to moderate and to fully converge.”

Financial Post

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