CPI, cost of living measure, but at what cost?

The Consumer Price Index. Is this really a true measure of the cost of living? The Bank of Canada has stated they want to keep inflation between 2 and 4% each year. Going back to 1998 and if we plug in $100 for their basket of items, we find that basket would cost us $125 in 2009. Hey, looks like inflation has been between 2 and 4% each year, right? We can always trust the government, right?

Inflation used to be referred to as the increase of the money supply. Now it is referred to a general rise in prices measured against a standard level of purchasing power. There are so many variables to consider in measuring the CPI. Weights, measures, productivity, technology advances, currency fluctuations, imports (cars,tv's,electronics) volatility, speculation, on and on. Oh, almost forgot, the biggest variable is the government itself! In my opinion these variables allow the government to fudge the numbers to fit into the 2 to 4% range ( “rent” as shelter costs?, yeah right!)

So lets just cut to the chase and look at some numbers that do not have BS all over them. All percentage increases are from 1998 to 2009. First off, we have food, which I used stats can. Food inflation is at over 50%. Which I know is in all reality higher, but I could not find any other numbers to prove that. Next is shelter which they use rent. Here, we will use house prices. The average house price has gone from 100k to about 280k in Saskatoon, an increase of 180%. The average Saskenergy bill has increased 60% while other utilities are over 60% as well. Cable and internet have increased over the Bank of Canada’s 25% but I do not have any reliable numbers. Gasoline has increased 75% ( down from a 169% increase from last summer). While the average price of a new car is at a total of 9%, the maintenance ( oil changes, etc) of that car has gone up over 100%. Car insurance has gone up a total of 6%. (SGI) In 1998, a bus pass cost $1, in 2009 it costs $2. 100% increase there. Tuition has increased about 66%(U of S). Price of the Star Phoenix paper has increased 100%. Movie tickets have increased 70%. Average restaurant prices have gone up over 50% if not more for some places. A case of beer (pilsner) at my favorite pub has increased by 40%.

Anything imported from Asia or has had a huge technological or productivity improvement has lowered prices. Having more Home Depots and Walmart has cut costs as well but at the expense of the mom and pop hardware and other stores. Computers have come down 60%. Not only has the technology vastly improved for tv’s, the prices have dropped 70% or more. Electronics seem to be getting cheaper every month. Household furnishings such as sofas, beds, stoves, fridges have all come down as well as clothing. 5 year mortgage rate in 1998 was about 7%, now it is around 4%. The prime rate was about 6% and now it is at 2.25% so interest costs have come down

I estimate that the actual inflation numbers have probably been around 7% per year on average if not more. And if the average wage has increased by 50% in this time frame, well, inflation has just become another tax. Are my numbers spot on? Some are, some are ballpark and some could be way off. But I know that my numbers are closer than the governments are. If the government had only measured inflation more accurate ( heck, only switch house prices for rent in computing the CPI) inflation would have been higher which in turn interest rates would have been higher. House prices and sales would not have hit the heights they have reached.

Over the last eleven years, this country has experienced a tech boom, a commodity boom , a real estate boom , baby boomers at their peak earnings age and with interest rates at artificial low rates throughout this time, the government paid down about 100 billion from 560 billion of debt. But since 2008 we are back over 500 billion. When will the debt clock be reversed again? Will we see 3 booms in the next 11 years like we saw in the previous 11?

So what is the damage of these manipulated low rates over the past few years? There has been no incentive to save but only get into debt. And to keep up with the cost of living, many have resorted to using some credit to make it. Going into debt is not necessarily a bad thing, but if it is being used for consumption motives rather than asset accumulation then things can get scary for those people. Now per capita debt is at all time highs. With rates at all time lows, interest rates will eventually rise because of inflation and/or because of high debt levels in which creditors will want higher rates for the risk. Will this be Canada’s version of subprime?

Going forward, taxes will definitely have to be increased to fund government deficits and spending. Many boomers will be retiring but spending less in the future compared to now. And don’t forget about the possible explosion of health care costs relating to the boomers. May we see the HST here in Saskatchewan down the road? And don’t forget about climate change. Whether you believe in it or not, some kind of tax is in the works from the powers to be. It’s too bad the government encouraged the people to go into debt rather than save for what is possibly coming.

In closing I won’t get into the theories on why the Bank of Canada has kept interest rates artificially low but it is clear that the little guy has been hurt because of the big guy. And I see nothing from the Bank in changing this in the future.