The Bank of Canada also has a mandate to keep inflation, as measured by the CPI, within a target range. Since 1993, the Bank and the federal government have agreed that the Bank will adjust its interest rates to maintain year-over-year CPI growth within a 1.0% to 3.0% range.
“Low, stable and predictable inflation is good for the economy,” the Bank notes, “and for your finances. It helps money keep its value and makes it easier for everyone to plan how, where and when they spend.” Governments around the world share these goals.
Controversies in the CPI
The CPI is not without controversy, however, and one of the most disputed aspects is how the index treats the cost of shelter.
The cost of housing prices is excluded from the CPI, although runaway housing costs have characterized the last decade in Canada’s major cities. Real estate prices are excluded because they incorporate the cost of both current and future shelter, while the CPI only includes current costs. For renters, the CPI includes the cost of rent, insurance, and maintenance and repairs carried out by the tenant; for home owners, costs such as mortgage interest, home insurance and property taxes are included, but the price of the house itself is not.
This technical explanation provides little comfort to Canadians watching as the price of housing soars in Canada’s largest cities even as the “official” CPI remains low. This tension hit a flashpoint in mid-August 2020, when Statistics Canada announced that yearly inflation had risen by just 0.1% from July 2019 to July 2020. This finding didn’t square with many people’s experience of yearly price changes—especially in the months since the COVID-19 pandemic started.
How COVID-19 changed the way we spend—in ways that official inflation doesn’t measure
The mismatch between Canadians’ experience of changes in the cost of living and the official inflation numbers was exacerbated by the COVID-19 pandemic, which, as noted by economist Justin Wolfers in the New York Times, “has made life more expensive in ways the official bean counters aren’t capturing.”
Beginning in February 2020, the pandemic changed the ways that people spent. For example, we bought more essentials, like groceries, causing their prices to rise, but buying fewer airline tickets and less gasoline and clothing, causing those prices to drop. For a while, there were some items, like haircuts, that we weren’t buying at all.
The pandemic also changed where and how people shop, such as by increasing the amount we spend on grocery delivery, which typically charges a premium although the underlying cost of the food may not have changed.