Does One Size Fit All? The CPI and Canadian Seniors

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.