Every month, a single number—the inflation rate—lands and reporters ask if life just got more expensive. But have you ever wondered what’s actually inside that number? In past articles, we discussed how much the cost of living has increased, and that higher costs remain the top issue in Canada even though the inflation rate has fallen from its post-pandemic highs. Today we dig into how prices are measured by Statistics Canada, the limitations and what the Bank of Canada pays attention to when setting monetary policy.

The basics

The inflation rate is measured by Statistics Canada using the Consumer Price Index (CPI). CPI tracks the cost of a fixed basket of goods and services over time, reweighted periodically to reflect how Canadians actually spend. It’s a comprehensive measure of price changes over time covering about 700 items in the Canadian basket of goods and services, but like any statistic, it has its limitations.

The CPI’s limitations

The Canadian CPI, like all measures of inflation, has structural limitations. For example: 

• It’s a fixed basket that only updates its weights periodically, so it lags real-time shifts in what people actually buy.
• There’s difficulty in capturing how people swap items when prices rise.
• It relies on averages. No individual household’s basket looks like the “average” one.

CPI isn’t experienced equally

Statistics Canada’s Survey of Household Spending shows that in 2023, the lowest income quintile allocated 34.8% of total consumption to shelter and 17.9% to food, a materially larger share than higher-income households, who instead allocate more of their spending toward transportation, recreation, and education.

Since food and shelter are the categories that have driven headline inflation over the past few years, the “average” CPI print has been systematically less representative of what lower-income households experience.

A Bank of Canada staff working paper makes this point even more directly: using detailed household-level purchase data, the authors find that Canadian households experience meaningfully different inflation rates, with low-income households facing higher inflation rates than high-income households, and official CPI figures don’t capture that variation.

The same research notes that lower-priced food products have been inflating faster than premium ones in recent years—meaning the households with the least room to trade down are facing the fastest price growth in the categories they can’t avoid.

Is CPI measured the same everywhere?

This is the part most people get wrong, because they assume “CPI” means the same methodology everywhere.

For instance, one of the factors responsible for the divergence in Canadian and U.S. inflation is differences in the way shelter is measured. In Canada, the cost of owning a home is calculated using actual cash expenses, such as mortgage interest, taxes, and maintenance. This is then combined with "replacement cost" to factor in the hidden, non-cash expense of a property's physical wear and tear. The U.S. takes a different approach by measuring owner-occupied housing using Owners’ Equivalent Rent (OER)—essentially asking homeowners what their home would rent for, to isolate the value of housing services rather than the asset itself.

So when the Bank of Canada hikes rates to fight inflation, mortgage interest costs rise in CPI, because pricier borrowing shows up as a price increase. Statistics Canada’s own researchers have noted this gives a volatile, policy-sensitive component outsized weight—something U.S.’s rental-equivalence approach avoids.

What the Bank of Canada pays attention to

So where does the Bank of Canada look to make interest rate decisions? To be clear, the takeaway of this Twenty-Four is not to diminish the value of the CPI. The key point, rather, is that the Bank of Canada doesn't lean on the headline number alone and neither should others. Since 2016, its three preferred core measures—CPI-trim and CPI-median—exist specifically to filter out noise and distortion, so that the focus is on the underlying trend rather than temporary swings. 

• CPI-trim strips out the most extreme 20% of weighted price changes at both ends of the distribution each month.
• CPI-median takes only the price change sitting at the weighted 50th percentile.

As we’ve discussed, the Iran war and the resulting supply shocks have caused rapid price increases in categories such as energy, reflected in elevated headline inflation numbers. However, upon examination of the Bank of Canada’s preferred core measures, inflation seems to be behaving and has not yet spilled over into the broader basket, holding within their inflation control target of 1-3%.

The bottom line

While the CPI is a widely utilized and powerful macroeconomic tool, it is crucial to recognize its limitations. Ultimately, the CPI functions as an aggregate average, effectively tracking the general magnitude and direction of price fluctuations across the broader economy. However, it is not designed to accurately reflect the day-to-day financial realities or the individual lived experiences of everyday Canadians.

Answer to the previous trivia question: China imported the most wheat from Canada in 2025. 

Today’s trivia question: In 1986, The Economist magazine created an index for measuring purchasing power in different countries. What fast food item is the basis of the index?