Now like GDP, CPI is another term that you often hear, but may not fully understand – but again it is a relatively simple concept, and like the GDP data, when the figures are announced the usd to cad rate will always move as volatility enters the market. In simple terms the Consumer Price Index provides a measure of the inflationary pressures ( or deflationary pressures ) currently in the economy. As such it is one of the most important pieces of information for the Bank of Canada, who’s principle task is to keep inflation within the 1% to 3% target range. Should the bank view the CPI figures as inflationary, then the market will view the likelihood of a rate rise with increased certainty. This in turn will affect the usd to cad exchange rates. Higher interest rates make holding the Canadian dollar more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the dollar.
The Consumer Price Index is calculated by Statistics Canada, and like the GDP figures is produced on a monthly basis, which again is very unusual. The index provides a simple measure of how changes in prices are affecting Canadian consumers and their relative buying power. Each month Statscan records the prices in a basket of goods and services. Items in the basket are changed from time to time according to trends and fashion as some products fall out of favour and others become market leaders. In simple terms the CPI figures indicate the purchasing power of the Canadian dollar. An increase in the CPI will mean that products and services are costing more, and Canadian consumers have to spend more dollars for the same basket of goods. There are three principle ways we can measure CPI and like GDP compare the data in order to arrive at some meaningful conclusions. Firstly we can look at month on month data, secondly the twelve month percentage change, and thirdly the annual average. So let’s take a look at each of these in turn.
The chart alongside shows the core CPI over the last twelve months from February to February inclusive. If we start by comparing month by month, then clearly March to April would certainly have raised some concerns as would May to June with core CPI rising from 2.2% to 2.5%. Thereafter each month on month is showing a fall by approximately 0.2%.
Finally between January and February the core CPI rises by 0.1%. So on a month by month basis with the rates falling, other than those two highlighted this would reduce the risk of inflation, and therefore higher interest rates which could affect the usd to cad exchange rates. If we now look over the 12 month period we can see that CPI has fallen from a high of 2.5% to a low of 1.5%, clearly within the bank’s target. Now the third way is to look at the annual average which is a little more complicated ( but not much so don’t worry!!)
We calculate the annual average in order to give us a better idea of how prices have changed over the year. Now it is important to understand the following – firstly we use 2002 as our base year which is taken as 100, so that everything is compared to a fixed baseline, and secondly the annual average is presented as an index figure ( e.g. 105) ) and we then convert to a percentage. Let’s look at an example and see how it works.
In the latest figures we have the following data :
- January 2008 All Items Index = 111.8
- February 2008 All Items Index = 112.2
- February 2007 All Items Index = 110.2
To calculate the change from January 2008 to February 2008 we use the following formula :
(Most recent index – older index ) / older index * 100%, which in this case would give us 112.2 – 111.8 / 111.8 * 100 = 0.36%. We would use the same formula to calculate the change over a 12 month period, which in this case gives us – 112.2 – 110.2/110.2*100= 1.8% so that over the year the country has seen core CPI increase by an average of 1.8% – well I did say it wasn’t complicated despite what the economists would have you believe!!! So there we are – a simple and quick analysis of CPI data which comes out monthly and should give you a good idea of what the Bank of Canada may decide in the future, which I hope will give you a much better idea of where the usd to cad rate is going, which is really all this site is about!
