The consumer price index (CPI) in Canada declined by .66 %, in April this year compared to the previous month.
On a year-over-year basis (i.e., compared to April 2019), it declined by .15 %.
This is the first year-over-year decline in the CPI observed in the month of April, since 1992.
The average year-over-year inflation rate (i.e., percentage change in the CPI) for the month of April is 1.74 %.
I am wondering if the CPI or the inflation rate of April 2020 really makes sense as a measure for the living cost during the lockdown of the Canadian economy.
Basically, the CPI is a weighted average of the retail prices of the goods and services consumed by households.
These goods and services are classified into eight product groups.
The table below shows the averages and the values in April 2020 of the year-over-year percentage change in each of these eight product groups' CPI.
| Product group | Average | April 2020 |
|---|---|---|
| Food | 2.24 % | 3.49 % |
| Shelter | 1.87 % | 1.32 % |
| Household operations, furnishings and equipment | 1.26 % | .24 % |
| Clothing and footwear | .06 % | -4.40 % |
| Transportation | 2.44 % | -4.39 % |
| Health and personal care | 1.45 % | 1.42 % |
| Recreation, education and reading | 1.44 % | -.26 % |
| Alcoholic beverages, tobacco … | 2.93 % | .41 % |
| All items | 1.80 % | -.15 % |
In April, the year-over-year percentage change in the CPI for food was 3.49 %, which is much higher than its historical average of 2.24 %.
The year-over-year percentage change in the CPI for shelter was also high (1.32 %) but below its historical average of 1.87 %.
These two product groups along with alcoholic beverages, tobacco products and recreational cannabis were mainly the goods deemed essential and mostly the only ones that were available to households, during the lockdown imposed by the federal and the provincial governments to stop the spread of the COVID-19.
The fact that their CPIs rose on a year-over-time basis and, at the same time, the year-over-year inflation rate fell casts a doubt on the use of the CPI for all items as measure of the cost of living.
It is true that the CPI for clothing and footwear and that for transportation fell by 4.4 % on a year-over-year basis, which has dragged down the inflation rate, but these goods and services were not those people in Canada mainly purchased during the lockdown.
One also ends up at the same conclusion, looking instead at the monthly growth rates of the CPI for these product groups.
In April 2020, the CPI for food grew by 1.12 % compared to March, the monthly CPI for alcoholic beverages, tobacco products and recreational cannabis grew by .12 %.
Shelter was the only product group deemed essential whose CPI declined (-.34 %).
One can still sustain that the .34 % decline in the CPI for shelter has caused a decline in the living cost during the lockdown, as both the year-over-year and the monthly inflation rates were suggesting.
To rule out this possibility, I have computed the shares of each of the eight product groups in the monthly inflation rate.
They are plotted in the pie chart below.
(I have computed these shares by performing a linearly constrained optimization.)
 |
| Figure: Shares of Eight Product Groups in the Monthly Inflation Rate |
It turns out that shelter is the product group that accounts for the largest share of the monthly inflation rate in Canada (27.5 %).
Food accounts for 16.5 % while alcoholic beverages, tobacco products and recreational cannabis accounts for 5.7 %.
Health and personal care accounts for the lowest share of the monthly inflation rate (4.7 %).
Even though shelter accounts for the largest share in the inflation rate, its contribution to the change in the living cost in April was only -.09 % (i.e., -.34 % x .275) whereas the contribution of food was .18 % (i.e., 1.12 % x .164) and that of alcoholic beverages, tobacco products and recreational cannabis was .01 (i.e., .12 % x .057).
My conclusion is that the CPI is a good measure of the level of prices, but it cannot accurately measure the change in the living cost in periods of economic lockdown.
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