Looking At Nutrient Inflation

The Canadian Consumer Price Index (CPI) was released in conclusion Friday, too it continued the tendency of remaining good below the Bank of Canada target of 2%. This was non also surprising, too thence I volition instead attempt out the demeanour of nutrient inflation inward or too thence to a greater extent than detail. Although I volition aspect at Canadian information inward this post, the demeanour is like inward other developed countries. What nosotros run across is that next social trends tin hold out increasingly expensive.



The Food element of CPI is broken upwards into 2 sub-components: nutrient from stores, too nutrient from restaurants. One obvious observation is that eating inward a eatery is to a greater extent than expensive than cooking the same repast at home. However, eating inward restaurants has also instruct relatively to a greater extent than expensive over time.

The nautical chart higher upwards shows the demeanour of the store-bought nutrient too eatery components of the CPI. The superlative panel shows the annual inflation rates since 1994. Restaurant prices are solely infrequently changed, too and thence the inflation charge per unit of measurement is less volatile than prices inward grocery stores. However, eatery owners get got tended to ignore Canada’s 2% CPI inflation objective. Additionally, the surge inward grocery shop prices inward 2008-2009 stands out, too did non actually opposite afterwards.

The minute panel shows the same 2 sub-component indices, measured inward constant (1961) dollars. (This is calculated past times taking the element index too dividing past times the overall CPI index, too multiplying it past times the factor that sets the novel index to 100 on Jan 1961.) What this measures is how these sub-components motion relative to the overall CPI basket. The nautical chart shows that eatery prices get got been rising relative to the overall cost index for several decades, piece grocery shop prices get got non risen much relative to the overall index.

Although restaurants get got instruct relatively to a greater extent than expensive than nutrient from grocery stores, the per centum of fourth dimension people dine out has been rising, non falling. (Unfortunately, I could non detect the history of the consumption weights, too thence that is an assertion on my part.) This agency that consumers are substituting towards the relatively to a greater extent than expensive eating pick over fourth dimension (which is the opposite of what is often assumed inward or too thence areas of economical analysis). This demeanour is explained past times rising existent incomes; consumers get got to a greater extent than coin to spend, too thence that they tin afford to accept the to a greater extent than expensive pick to a greater extent than often.

Another way to aspect at this: firms that attain goods or services that are pop get got to a greater extent than pricing power, too and thence they tin brand higher upwards average cost hikes stick. And this regulation appears to concur across other classes of consumer goods.

An Side Comment On Inflation Psychology

 

I noted 1 interesting affair when looking at the Statistics Canada data. They position out the prices of or too thence generic goods on a monthly basis. This is useful, equally yous tin compare their information to your personal experience, piece the CPI index numbers cannot hold out related to. What I industrial plant life is that fifty-fifty inside the category "beef", at that topographic point was or too thence fairly impressive difference of relative inflation rates. Between June 1995 too Oct 2013, set down beef prices rose at an annual charge per unit of measurement of 5.2% (prices rose past times a factor of 2.53x) , whereas circular steak prices solely rose at 1.8% annualised (1.41x).

This shows the uselessness of personal anecdotes to depict conclusions close the validity of CPI statistics (which is a really pop pastime on the internet). The cost of 1 type of beef rose at less than the 2% target over the past times xviii years, whereas or too thence other beef production had an inflation charge per unit of measurement to a greater extent than than double that target. If yous only cherry pick a few atypical examples, yous tin in all likelihood conclude almost any yous desire close the cost level.

Implications For Personal Finance

This pricing dynamic has unwelcome implications for consumers who desire to follow social trends. The goods too services that yous purchase volition hold out increasingly weighted towards those goods that are rising faster than the overall CPI index. Since a lot of people follow social trends (almost past times definition), this may explicate why a lot of people complain why their personal cost-of-living is running good higher upwards the official CPI inflation rates.

Some final thoughts:

1. Inflation assumptions inward personal finance plans should in all likelihood hold out nudged upwards relative to what is expected for CPI inflation. For example, fifty-fifty if yous believe that the Bank of Canada tin hitting its inflation target of 2%, yous in all likelihood however demand to factor inward a faster charge per unit of measurement of growth inward your personal cost-of-living.
2. Indexed pensions or inflation-linked bonds volition in all likelihood endure or too thence slippage versus your cost-of-living over a long fourth dimension period.
3. If yous desire to command costs, it may hold out an sentiment to prepare a habit to avoid next the herd.

And finally, since nosotros are talking close food, it is in all likelihood a practiced fourth dimension to wishing my American readers a practiced Thanksgiving holiday.

(c) Brian Romanchuk 2013