Why is it so hard for Canadians to believe the ‘benign’ inflation rate?

The Globe and Mail | Published Wednesday, March 22, 2017

If there’s one message on inflation from the Bank of Canada these days, it is this: There isn’t any. In its most recent press release on interest-rate policy, the Bank said, “… three measures of core inflation, taken together, continue to point to material excess capacity in the economy.” That’s an economist’s cryptic way of saying inflation isn’t a problem.

So if inflation is so benign, why don’t Canadians believe it?

This isn’t a question of the integrity of Statistics Canada – no one is implying (at least not to me) that they don’t trust the work of our national statistical agency.

Rather, they simply don’t believe that inflation is a lowly 1 per cent or 2 per cent a year. There are a few reasons why Statistics Canada’s official rate of inflation is so different from what many Canadians feel they are experiencing.

The first factor has to do with our natural tendency to notice the headwinds but ignore the tailwinds. Psychologists call this the “hedonic treadmill” – we may be pleased to notice a 10-cent drop in the price of gasoline, but the pleasure wears off quickly. If prices jump back up by a nickel the next week, we will grumble loudly and feel we are worse off. We simply pay more attention when prices go up, and less attention when they fall.

There may be some evolutionary genetic trait to explain this. A caveman would have experienced extreme duress and alarm when a sabre-toothed tiger threatened to pounce. But he’d have taken proportionately far less pleasure when encountering a rabbit or deer, even if they actually contribute to his survival. We notice threats more than opportunities.

The second factor involves consumer spending on discretionary versus non-discretionary items. Between January, 2007, and January, 2017, the all-items index of consumer prices rose 18 per cent. But that masks a huge disparity in price movements for particular items within the basket of goods and services.

For example, over the last 10 years, prices have fallen for flat screen TVs (down 60 per cent), audio equipment (down 36 per cent), women’s clothing (down 17 per cent) and household appliances (down 4 per cent). New cars and trucks have shown statistically no price increase. These favour higher-income Canadians with more discretionary dollars to spend.

But price increases have been unrelenting for other items, many of them non-discretionary. Parking fees (up 51 per cent), child-care services (up 43 per cent), tuition fees (up 40 per cent) and public transportation fees (up 37 per cent) top the list. Other things, such as food from grocery stores (up 27 per cent), and electricity (up 33 per cent) have also outpaced the all-items inflation rate.

So, if you are a low-income household spending disproportionately more on basic necessities, your inflation rate is anything but low and benign.

Finally, there are dozens of prices that Canadians face which are simply not captured by the consumer price index [CPI]. The price of a home, for example, is not included (although many costs associated with home ownership are, such as mortgage insurance and maintenance and repairs). Inflation does not feel low, particularly for property buyers in Vancouver and Toronto.

Other costs are similarly not covered by the CPI survey: fees for students’ field trips, tipping in restaurants (the standard has risen from 15 per cent to 20 per cent), paying for food on airplanes, and even being asked to give an extra dollar or two “to charity” at the check-out in certain retail stores. These things are typically optional, but have become customary and expected costs, eating into consumers’ budgets.

Our national statistical agency does a great job in providing data each month on consumer prices. Yet, the low inflation reports don’t convey the reality faced by Canadian households. It’s not that the figures are incorrect. It’s just the way we naturally pay attention to price movements – and the growing list of expenses that most of us are facing.