How to personalize inflation

Tell a Toronto homebuyer or an Iqaluit grocery shopper that inflation is just 1%, and they’ll laugh in your face.

That’s because official inflation numbers blend hundreds of prices from across the country. To properly advise clients about rising costs, you need to look beyond economic statements.

To start, let’s define key terms. Statistics Canada releases the Consumer Price Index each month. The index takes a fixed basket of consumer goods and measures changes in the components’ price levels. And while some components are more specific than others—“area rugs and mats” and “ham and bacon” are each CPI subcategories—the basket is ultimately a generalization.

As a result, the basket can’t reflect a specific client’s spending. For instance, within CPI, tobacco and alcohol account for 2.63% of consumer expenditures. If your client’s a non-smoking teetotaler, that’s an overestimation. Or, if he’s got a chronic condition and lacks medical coverage, his prescribed medicines bill could account for more than the basket’s meagre 0.69% weighting.

StatsCan acknowledges these limitations. In a CPI primer, the agency states, “Each consumer buys a different combination of these goods and services, and it would be unlikely for any consumer to buy everything on the list at one point in time.” As a result, CPI “cannot, and should not, be expected to reflect the price change experience of any particular household or person.”

But since you know your clients’ habits and goals, you’re uniquely placed to hold up a mirror. And we can help. We’ve created a tool (download it here) with instructions on how to determine a client’s personal CPI.

The tool requires inputting a client’s annual spending (precise or estimated). The results won’t be perfect, since the eight basket categories are general (e.g., the shelter category blends rental [6.35% of the basket] and owned accommodation [16.5%] costs). To address that, you could determine your client’s subcategory weightings, but doing so may not be worth the effort (StatsCan tracks 600 goods and services).

Regardless, the tool’s meant to show where a client’s personal inflation rate is lower or higher than official CPI.

Instead of inputting individual clients, you could create archetypes: the mortgage-free traveller (lower housing and transport weightings; higher recreation) and the car-free downtown dweller (higher housing; lower transport).

The tool can also show how a client’s spending compares to CPI’s basket weightings: “pet food and supplies,” for instance, is allotted 0.54% under the household category. If clients are spending more, proportionally, they can revisit their cat food brand or cut down in another area.

Clients need advisors who create holistic plans for their personal circumstances. Protecting them from inflation—by letting them see a personalized inflation number—is yet another way to customize your advice.

CPI basket weightings

The major component categories of CPI are:

• Food: 16.23% (ham is in this category)
• Shelter: 27.15%
• Household operations, furniture and equipment: 12.97% (rugs and pet food are in this category)
• Clothing and footwear: 5.44%
• Transportation: 19.7%
• Health and personal care: 5% (medicines are in this category)
• Recreation, education and reading: 10.89% (travel is in this category)
• Alcoholic beverages and tobacco products: 2.63%

Source: Statistics Canada

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.