6: Cost of Living

Consumer Price Index (CPI)

A measure of the overall cost of a fixed basket of goods and services bought by a typical consumer.

Inflation

A situation in which the economy’s overall price level is rising, measured as the percentage change in CPI.

Inflation Rate Calculation

CPI2 - CPI1) / CPI1.

Core Inflation

Inflation that excludes the most volatile components like fuel and food, used to predict underlying inflation trends.

Commodity Substitution Bias

The tendency of consumers to substitute cheaper goods when prices rise, potentially skewing CPI results.

New Goods Effect

The phenomenon where the introduction of new products adds variety and impacts the perceived cost of living.

Unmeasured Quality Change

Changes in product quality that can affect the value of money, with StatsCan adjusting CPI for these changes.

Interest Rate

A payment made for borrowing money, affecting the real purchasing power over time.

Nominal Interest Rate

The interest rate that measures the change in dollar amounts without adjusting for inflation.

Real Interest Rate

The interest rate adjusted for inflation, indicating the actual purchasing power of interest earnings.

Indexation

The automatic adjustment of income or benefits to keep up with inflation.

GDP Deflator

An index that reflects prices of all goods and services produced domestically and excludes imports.

Tariffs

Taxes imposed on imported goods which can lead to higher prices in the domestic market.

Cost of Living Allowance (COLA)

A salary adjustment tied to the rise in the Consumer Price Index.

Pension Adjustments

Adjustments made to pensions based on CPI to maintain purchasing power for retirees.

Real Wage Gain

The increase in purchasing power resulting from wage increases that outpace inflation.

Whole Item Inflation

Inflation calculated across all goods in the CPI basket.

High CPI Impact

When CPI increases, it affects the overall cost of living for consumers.

Inflation Targeting

A monetary policy strategy in which a central bank sets a 2% inflation rate as a goal.

Purchasing Power

The ability to buy goods and services, significantly affected by inflation.

Consumption vs. Investment

CPI includes prices of goods/services bought by consumers while GDP deflator does not include imports.

Impact of Low Real Interest Rates

Lower interest values can lead to increased housing prices due to affordability perceptions.

Focus Groups for CPI

Surveys conducted to determine which goods are most important in calculating CPI.

Seasonal Unemployment

Employment patterns that change with seasons, impacting job availability in certain sectors.