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Does One Size Fit All? The CPI and Canadian Seniors

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  • Matthew Brzozowski
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    Abstract

    This paper examines the effectiveness of the CPI as a measure of inflation faced by Canadian seniors. I construct a democratic price index and show that the average inflation rate (average when measured by the CPI) is often a very poor measure of inflation rates relevant to individual households. The proportion of individual, household specific price indexes falling more then one percentage point above or more then one percentage point below the CPI often remains high regardless of how closely the mean democratic index approximates the CPI. Further, I demonstrate that the CPI has considerably overstated the inflation faced by Canadian seniors during 1970s and 1980s while more or less accurately capturing inflation during the 1990s. I show that the limitations of the CPI apply to both the senior and the non-senior Canadians in a nearly equal manner. The proportion of individual inflation rates falling significantly above or below the CPI is similar for both segments of the society and so is the time pattern of overstating the average inflation rate.

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    File URL: http://socserv.mcmaster.ca/sedap/p/sedap130.pdf
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    Bibliographic Info

    Paper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 130.

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    Length: 44 pages
    Date of creation: Sep 2005
    Date of revision:
    Handle: RePEc:mcm:sedapp:130

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    Keywords: Consumer Price Index; Inflation;

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    References

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    1. Katharine G. Abraham & John S. Greenlees & Brent R. Moulton, 1998. "Working to Improve the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 27-36, Winter.
    2. Wood, Robert G & Corcoran, Mary E & Courant, Paul N, 1993. "Pay Differences among the Highly Paid: The Male-Female Earnings Gap in Lawyers' Salaries," Journal of Labor Economics, University of Chicago Press, vol. 11(3), pages 417-41, July.
    3. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    4. Beatty, Timothy K.M. & Larsen, Erling Roed, 2004. "Using Engel Curves To Estimate Bias In The Canadian Cpi As A Cost Of Living Index," Working Papers 15836, University of British Columbia, Food and Resource Economics.
    5. Angus Deaton, 1998. "Getting Prices Right: What Should Be Done?," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 37-46, Winter.
    6. W. Erwin Diewert, 1998. "Index Number Issues in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 47-58, Winter.
    7. Bruce W. Hamilton, 2001. "Using Engel's Law to Estimate CPI Bias," American Economic Review, American Economic Association, vol. 91(3), pages 619-630, June.
    8. Allan Crawford, 1998. "Measurement biases in the Canadian CPI: An update," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 39-56.
    9. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
    10. Adonis Yatchew, 1998. "Nonparametric Regression Techniques in Economics," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 669-721, June.
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