Perhaps the bank’s focus on short-term problems in the CPI is enough for its two per cent target for annual inflation, but it ignores difficulties with the long-term trend of prices and living standards, writes Philip Cross in the Financial Post. Below is an excerpt from an article, which is can be read in full here.

By Philip Cross, September 3, 2020

Bank of Canada Governor Tiff Macklem last week expressed concern that a growing number of Canadians are skeptical about the inflation rate as measured by Statistic Canada’s Consumer Price Index (CPI). People question the relevance of an index that continues to price things they no longer buy, such as tickets for airplane travel or large concerts and sporting events, while the prices of things they do still buy, most notably food, are clearly rising.

Macklem framed the issue with the CPI in a way that is in fact not very important and relatively easy to address. The specific problem of rapid shifts in the basket of goods and services Canadians buy is not hard to tackle. The Bank of Canada, working with StatsCan, has found that updating the weights to reflect the new reality of what Canadians are purchasing in the post-COVID world does not significantly change measured inflation. And StatsCan is now working on an interactive CPI where consumers can choose their own weights.

Perhaps the bank’s focus on short-term problems in the CPI is enough for its two per cent target for annual inflation, but it ignores difficulties with the long-term trend of prices and living standards. This larger problem with the CPI measure of inflation, which Governor Macklem did not address, is adjusting for new products and the changing quality of our purchases, not their list prices. In principle, adjusting the CPI for changes in quality is something that should be done for every component. In practice, only prices for autos and computer-related goods reflect changes in quality. Auto prices, for example, were adjusted down to reflect such quality improvements as airbags and catalytic converters.

The pandemic has led to a large deterioration in the quality of some purchases simply because customers have to wait in line for everything from entering a grocery store to visiting their local bank branch. Waiting in line is clearly a cost. In theory, every minute you spend waiting could be used to earn more income at your current hourly wage. The problem is that StatsCan has no experience or methodology for measuring wait times: for example, when should the wait time at the local grocery store be sampled, and what is the value of the time of people waiting in line when not everyone makes the same wage? Though many solutions are possible in theory, in practice the deterioration in quality and de facto increase in prices due to the pandemic are not reflected in the CPI.

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