The Consumer Price Index, or CPI, is a measure used to track changes in consumer prices over time. Its purpose is to approximate your cost of living: the minimum cost of attaining a given level of utility, or standard of living.
Statistics Canada has released CPI data for the month of February. As expected, prices continue to rise due to continued money-printing by the Bank of Canada. To better understand Canadian monetary policy, please watch this short video illustrating how it works (thanks to Dr. Gary North for the recommendation):
Because continually printing money raises prices, it appears that the Bank of Canada will have to resort to other measures to achieve their mandate of working “to preserve the value of money by keeping inflation low and stable.” According to The Globe and Mail, it appears those crafty central bankers have a solution:
(S)ome economists outside Statistics Canada have argued the consumer price index’s measure of inflation overestimates what’s happening – concerns that echo a longstanding debate in other countries, such as the United States.
Statistics Canada acknowledges that one kind of bias that creeps into consumer price tracking can add as much as 0.2 percentage points to the consumer-price-index measure of inflation – meaning that when inflation is measured at 2 per cent, the true rate would be 1.8 per cent.
The agency is more than 18 months into the CPI Enhancement Initiative, which attempts to improve the precision of its work. Statscan received extra funding to tackle the “measurement bias” – cash that rises to as much as $15-million in the fifth year of the effort – and make the index more attuned to Canadians’ spending habits.
Please allow me to summarize: central bankers see that the CPI is above target; instead of turning off the printing press or embracing sound money, they will simply change the methodology of the CPI to achieve their desired results. How convenient.
One of the “measurement biases” used to justify a re-tooled CPI is the “commodity substitution bias”. From a 2005 Bank of Canada working paper on the subject (emphasis mine):
Since the basket contents of the Canadian CPI are updated only about once every four years, substitution by consumers between goods and services (in response to changes in relative prices) during this time can lead to an overstatement of the cost of living. For example, were the price of beef to increase substantially between basket updates, consumers might substitute away from beef and towards other meats, such as pork or chicken.
…This would lead to an overstatement of the minimum cost of achieving a given level of welfare or utility, and the index would thus be upwardly biased.
In economics, utility is defined as “the capacity of a commodity or a service to satisfy some human want”. It is spurious for statisticians to purport to objectively quantify utility. For example, if an increase in the price of steak forces one to switch to eating chicken for dinner, it may result in a considerable loss of satisfaction and a perceived reduction in the standard of living. For someone else it may not.
Actual choice obviously cannot demonstrate any form of measurable utility; it can only demonstrate one alternative being preferred to another.
If the CPI is reconfigured to depress inflation, it will lose its credibility as a measure of the cost of living to maintain a constant standard of living. It will result in a decrease in cost-of-living increases for wages and pensions that are indexed to the CPI. It will result in a decreased standard of living for these people.
But, look on the bright side: so long as your grocery budget enables you to survive on dog food, there will be no inflation.
Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.