One of the important economic indicators to monitor as an investor is inflation. The following post will examine what exactly inflation is, what are the historical trends and where you can find data on inflation.
What is Inflation?
Inflation is defined as the general rise in prices in an economy over time. When prices rise each dollar purchases fewer goods and services leading to a loss of purchasing power and a decrease in the real value of money.
The most common measure of inflation is the inflation rate which in Canada is measured as the change in the Consumer Price Index (CPI) over time.
What is the Consumer Price Index?
The Consumer Price Index is a measure of a basket of goods and services that a typical Canadian household purchases. The basket of goods and services is held constant and the market prices of those goods are services are measured at different periods of time to determine the general level of prices. The Bank of Canada publishes a Total CPI index and a Core CPI index. The difference between the two is that the Core CPI excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products).
The graph below displays the historical level of the Total CPI over the period of January 1995 to June 2009.
How is the inflation rate calculated?
The inflation rate is calculated as the percentage change in Consumer Price Index at two different periods of time. Most often the two periods of time are year over year (For Example June 2008 to June 2009). The Bank of Canada publishes two different inflation rates referred to as Total Inflation and Core Inflation. The difference between the two being that Core Inflation is calculated using the Core CPI.
The graph below illustrates the Total Inflation Rate and the Core Inflation Rate for the period of January 1995 to June 2009.
Inflation Rate Historical Stats
I often find myself using inflation as an input in my financial models as a discount rate to calculate inflation adjusted present values. The statistics below will give you a ballpark number for historical inflation rate averages if you are curious as to what they are.
Average Inflation Rate: 2.02%
Average Core Inflation Rate: 1.82%
Standard Deviation of the Inflation Rate: 0.84%
Standard Deviation of the Core Inflation Rate: 0.44%
