Canadians often marvel at the fact that inflation remains stubbornly subdued despite the fact that life seems more and more expensive.
Economists, too, have been wondering why one of the country’s leading measures of price levels, the Consumer Price Index compiled by Statistics Canada, continues to show such lacklustre growth when the economy is healthy, unemployment is low and the Canadian dollar is weak.
On Tuesday, National Bank suggested in a research note that the trouble might lie in StatsCan’s method for tracking so-called shelter costs, the portion of income that Canadian households spend to keep a roof of their heads — whether it’s home ownership costs or rent.
“This heavyweight component of the CPI (27 per cent of the index) is currently growing an anemic 2.2 per cent annually compared to a more robust 2.7 per cent for all other services,” wrote National Bank economists Stefane Marion and Matthieu Arseneau.
The authors proceeded to note that StatsCan’s New Housing Price Index, which forms parts of the agency’s estimate of shelter costs, registered virtually no change for the Vancouver market since 2008.
“We are also baffled by the reported cumulative increase of only 37 per cent for the Toronto NHPI since 2008 (vs. 118 per cent according to resale market data),” wrote Marion and Arseneau.
They also noted rent inflation averages near a record low of one per cent in Toronto, Montreal and Vancouver.
And that’s despite the fact that headlines about doubling rents in Toronto recently prompted the Ontario government to boost rent controls in the province.
“Bottom-line: Shelter cost inflation reported in the Canadian CPI report is eerily low,” the National Bank report concludes.
So, does Canada’s official inflation estimate really underplay housing costs?
When asked about it, StatsCan told Global News it doesn’t believe CPI “significantly” underestimates shelter costs.
Discussing why its measure of home prices for new homes in Vancouver and Toronto shows such little change over the past decade or so, StatsCan said that the index excludes condos and “for quality adjustment purposes” tends to focus on buildings in areas far from urban centres where price appreciation might be lower.
However, none of that affects the inflation measure in a significant way, because CPI is more focused on tracking how much it costs to own or rent a home, rather than what it takes to buy one, director of consumer prices division, Richard Evans, told Global News.
And with mortgage rates so low, the cost of owning a home is at record lows.
StatsCan added it is working on a new condo price index, as well as a Residential Property Price Index that will cover both new and existing homes. Both will be rolled out in 2018 and become part of the CPI, the agency added.
On rents, the statistics bureau said it relies on data from the Labour Force Survey. The measure records the prices of rents by following a sample of renters through a period of five months. Every month, a new sub-section of renters (equal to one-sixth of the sample) is added to the group and an equally-sized batch is rotated out.
This method has worked well in the past, said Evans, but the agency has started noticing its index is trending lower compared to other rent indexes.
The statistics bureau is “investigating other data sources to supplement its current measure of rents and track rent changes over a longer period of time.”
Still, if you expect any of the new measures to significantly drive up the official measure of inflation, you’ll probably be disappointed.
StatsCan doesn’t anticipate any meaningful variations. If anything, it told Global News, its CPI measure tends to overestimate the cost of food, as it can’t track in real time how Canadians change their shopping habits in response to price trends, by swapping out of their carts rapidly appreciating items in favour of cheaper goods. (This is a shortcoming of CPI measures in general, not just Canada’s.)
Frustrated prospective homebuyers might just have to accept the fact that the inflation index will never be a reflection of their plight.