E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

• August 16, 2012

  Measurement Bias in the Canadian Consumer Price Index: An Update

  Bank of Canada Review - Summer 2012 Patrick Sabourin

  The consumer price index (CPI) is the most commonly used measure to track changes in the overall level of prices. Since it departs from a true cost-of-living index, the CPI is subject to four types of measurement bias—commodity substitution, outlet substitution, new goods and quality adjustment. The author updates previous Bank of Canada estimates of measurement bias in the Canadian CPI by examining these four sources of potential bias. He finds the total measurement bias over the 2005–11 period to be about 0.5 percentage point per year, consistent with the Bank’s earlier findings. Slightly more than half of this bias is caused by the fixed nature of the CPI basket of goods and services.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Inflation targets JEL Code(s): E, E3, E31, E5, E52