True cost of living measures for 10 provinces: Using an Engel Curve approach

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New Brunswick Institute for Research, Data and Training


What is the “True Cost of Living” in Canada? In Canada, the Consumer Price Index (CPI) is the official measure of the cost of living used by government and other organizations to make policy decisions, such as how to index salaries, public pension payments, and minimum wages. If the CPI does not accurately represent the cost of living, taxpayers could end up paying more than intended, and some households could receive less in the form of transfers and wages. It is therefore important that the “true cost of living” is measured accurately. Using 1997-2015 data from the Survey of Household Spending, researchers at the New Brunswick Institute for Research, Data and Training (NB-IRDT) construct “true cost of living” measures for subgroups of the Canadian population based on consumers’ behaviour while estimating biases in the official CPI. Results show that provincial CPI measurements significantly vary from the true cost of living – particularly after the 2008-2009 recession. While the CPI suggests no major shocks to the economy, this report suggests a sharp increase in the cost of living and a decrease in real incomes for all Canadian households – an economic shock that persisted beyond 2012, particularly for females and households with children. For instance, structural changes in the location and slope of Engel Curves after 2009 also appear to coincide with various economic shocks. For instance, gasoline prices increased abruptly in 2010, and energy and food prices have continued to rise. Likewise, after 2009, consumers faced tighter access to consumer credit, which was accompanied by an increase in consumers paying down debt during a time of rapid growth in commodity prices. These findings suggest that households were not buffering against price shocks following the 2008-2009 recession.