Wednesday, December 4, 2013

The Consumer Price Index across Canada

To measure change in the cost of living, Economists use the consumer price index (CPI). This statistic is a weighted average of the prices of a fixed and representative basket of items consumed by urban households. These items include, inter alia, food, shelter, clothing, housing, transportation, health and personal care, and education.  The CPI indicates the average percentage change in prices at a given time in relation to a base year. In this article I give a brief portrait of the evolution of the CPI across the ten provinces and three territories of Canada over a period of 422 months ranging from September 1978 to October 2013.  I point out the parts of our country where the change in the cost of living tends to be higher than the national average.

The provinces and territories of Canada are:
  • The Atlantic Provinces: Newfoundland and Labrador (NL), Prince Edward Island (PE), Nova Scotia (NS), New Brunswick (NB),
  • Central Canada: Quebec (QC), Ontario (ON),     
  • The Prairie Provinces: Manitoba (MB), Saskatchewan (SK), Alberta (AB),
  • The West Coast: British Columbia (BC),
  • The Northern Territories: Yukon (YT), the Northwest Territories (NT), and Nunavut (NU).

The Evolution of Prices across Canada
The figure below plots the national CPI and those of all the provinces and territories grouped by region. One can notice that:
Figure: Log of Consumer Prince Index, All Items, 2011 basket, 2002=100, Canada, Provinces and Territories, 1978:M9-2013:M10, Data Source: Statistics Canada.

  • In all over Canada, prices are trended upward,
  • At times, prices in some provinces and territories are lower or higher than the national average.

The Deviation of Provincial and Territorial CPIs from the National Average
I have analyzed the percentage deviation of each province’s and territory’s CPI from the national average. In Table 1, below, I have reported both the means and standard deviation of these series.
Table 1, Means and Standard Deviations of the Difference between the Log of Provinces’ and Territories’ CPIs and the Log of the National CPI, 1978:M9-2013:M10.

After some statistical tests performed on the means reported in Table 1, I find out that changes in the cost of living tend to be
  • Above the national average in Newfoundland and Labrador, the Prince Edward Island, Nova Scotia, New Brunswick, Quebec, British Columbia, Yukon, and the Northwest Territories,  
  • Below the average in Ontario, Manitoba, Saskatchewan,  Alberta, and Nunavut.
I compare my results to the ranking of the most expensive cities in Canada. I am interested in finding out whether the highest changes in the cost of living take place in provinces whose major cities are ranked among the ten most expensive in the country.  

It appears in Table 2, above, that three cities in Ontario, three others in Alberta, and one city in Saskatchewan appears in the top ten list. But these three provinces are parts of Canada where the change in the cost of living tends to be lower than the national average. This leads me to conclude that the highest increases in the cost of living are not always taking place in such most expensive provinces as British Columbia but also in more affordable places such as the Atlantic Provinces or part of the Northern Territories.
The relationship between the Provincial and the National CPIs
Table 3, below, displays the partial correlation coefficient between the provincial and national CPIs. The partial correlation between the national CPI and that of a given province measures the intensity of the relation between these two variables isolating the effects of other provinces’ CPIs.

Table 3: Partial Correlation Coefficients between the Provincial and National CPIs, Canada, 1978:M9-2013:M10.

The partial correlation coefficients with the national CPI are positive across all provinces.  However the partial correlation between the national CPI and those of the Prince Edward Island and New Brunswick are weak and turn out not to be statistically significant. This means changes in prices in these two provinces do not much influence the national average.  To better understand this latter evidence I display in Table 4 below the shares of each of the ten provinces’ gross domestic product (GDP) in the national GDP.  One can see that the GDP of the Prince Edward Island and New Brunswick represent respectively, on average, .31 % and 1.91 % of the national GDP. Moreover, without any surprise, one can relate the strength of the partial correlation to the importance of the share of the provincial GDP.  

Table 4: Average Percentage Share of the Provincial GDPs in the National GDP, Canada, 1981-2010, Annual

Observe from Table 4 that the ten provinces account for 99.48 % of the national GDP. The other .52 % is the share of the three territories and Canadian residents living outside the country.
Another insight from the results in Table 3 is that a monetary policy aiming at fighting in inflation, i.e., a generalized increase in price level, nationwide will not have the same effects in all the provinces. It might even be ineffective or just produce little effects in such places as the Prince Edward Island and New Brunswick.
Summing up,
  • Changes in the price level are generally above the national average in the Atlantic Province, Quebec, the West Coast, and part of the Northern Territories.
  • A monetary policy aiming at curbing inflation will not have the same effects across all Canada and may be ineffective some Atlantic Provinces.