Why inflation doesn't feel low and what you can do about it: Don Pittis

Members of the media are often met with skepticism when covering the rate of inflation.

On Wednesday, Statistics Canada issues its latest calculation of the consumer price index, and once again, there will be many who feel the figures simply don't reflect the rising costs they face for daily necessities from food to housing.

For people like Bank of Canada governor Tiff Macklem, worried about the prospect of deflation — the falling prices that most economists fear can lead to deeper recession — public distrust of the data they rely on sends a mixed message.

Macklem said last week that the public is better off if people understand how the bank tries to keep inflation on target.

"Those benefits hinge importantly on people really understanding the regime and that really comes down to the importance of listening to Canadians and communicating with Canadians," Macklem said last week in a Q&A session with the Canadian Chamber of Commerce.

Feedback loop

But in some ways, complete confidence in the way Statistics Canada counts inflation may not be an entirely good thing when prices are not rising fast enough.

While central banks may not like to admit it, what the bank would consider a misunderstanding that inflation is higher than official calculations show could be beneficial when prices are in danger of falling.

That's because research has shown that like an Escherian stairwell or waterfall, public perception of high inflation may create a feedback loop that actually contributes to higher inflation.

As with many statistics, exactly how we should correctly measure inflation is disputed, and like all statistics, the consumer price index is a mathematical construct that tries to quantify an economic concept.

Educating Canadians

As part of its campaign to educate Canadians about inflation and inflation targeting, the Bank of Canada created this explanatory video:

But just as with many other economic concepts meant to impart basic understanding, the reality is far more complex.

Housing is a case in point. A Reddit forum deconstructing a previous column on inflation objected to the suggestion that most Canadians had never experienced inflation. The contributor on Reddit pointed out that "the price of houses has gone up 200 per cent." That was two years ago. The percentage, especially in Canada's hottest markets, would be much greater today.

While that Reddit contributor and many others may think of housing as a consumer good, in financial terms it is considered an asset like bonds that rises as interest costs fall. Even as down payments and principal payments soak up a bigger share of your income, making you feel poor, it is interest costs, not loan repayments, that show up in CPI.

"Consumers, on average, think inflation is higher than what is measured and reported by statistical agencies," said Bank of Canada deputy governor Lawrence Schembri, foreshadowing a report on consumer expectations coming out next month.

Part of the reason, he said, is behavioural psychology. People simply pay more attention to prices that are rising, perhaps because price rises hurt, rather than to falling prices that bypass painlessly.

Another difference between what consumers feel and what the official numbers tell us can seem to many like a sleight of hand. When the price of cars rises, for example, the statisticians insist part of that increase is because you are getting a better car than you would have got in the past, so not all of the increase is counted.

Even more surprising to many, if the price of something like TVs or cellphones stays the same, the statisticians actually count them toward a fall in prices because, once again, you are getting technologically improved gizmos for the same dollars.

While it is possible to argue the case for that kind of conceptual calculation, in a world where having the latest phone is seen as a social necessity, it may be that the rising cost of true necessities such as food to feed your family ends up getting less weight in the basket of consumer goods.

Poor suffer less

In the footnotes for Schembri's speech on inflationary expectations, the bank says poorer people have actually suffered less from inflation than others over the last five years partly because rents, which have not been rising so quickly, take up a larger percent of budgets. But food, which has been rising, also takes up a greater share of lower-income budgets.

For those who drive, falling oil prices have kept costs down. A rising Canadian dollar has held down the cost of imports. But in the previous inflation figures the big price plunges were in things nobody really wants just now: hotel rooms down 27 per cent and flights down about nine per cent.

As Macklem pointed out in his speech last week, some of Canada's least well-off suffered serious economic pain, while the incomes of those with desk jobs who could work from home were almost unaffected. Figures on Friday showed that with fewer opportunities to shop and government income support, Canadians have on average been paying down debt, which would indirectly help hold inflation down.

But if you don't believe the latest inflation figures, you still have time to weigh in. The Bank of Canada's short survey on how you feel inflation in affecting you is available until the end of this month.

As prices stay low, some worry that the pain for the economy is still ahead as mortgage deferrals run out and the unemployed struggle to replace jobs lost in what Macklem called the deepest recession since the Great Depression.

And for those whose net income is falling, no matter what the inflation statistics tell us this week, everything is more expensive.

Follow Don Pittis on Twitter: @don_pittis