Inflation at 14-month low, but how do they know?

Canadians have historically had a hard time squaring the consumer price indexwith the sense that prices everywhere are inexorably on the rise. But in a sense, thats why the index is so important.

Of all the economic indicators out there, the CPI isprobably the single most pervasive of them all. It not only tracks how much we are paying for goods and services, it influences everything from pensions to tax brackets, from interest rates to wages.

We are fighting against a moving target. We always have to be adapting.- Richard Evans, Statistics Canada's CPI program

Canada's inflation rate fell to its lowest in more than a year this January, Statistics Canada said Thursday. From this time last year, the CPI rose just one per cent.

On a seasonally adjusted, month-to-month basis, prices actually fell 0.2 per cent. That said, core inflation which excludes the most volatile components, most notably gasoline, rose 2.2 per cent.

Those numbers may seem counter-intuitive to many consumers.

The CPIhas been compiled in some form or another since 1914. Today, the process of gathering prices and comparing them to historical trends is enormously complex.

"Thething just won't stand still, keeps moving, purchasing patterns change, the products people buy change," says Richard Evans, director of the CPI program at Statistics Canada. "The characteristics of the products change. We are fighting against a moving target. We always have to be adapting."

Top-secret price collection

To fight that moving target, Statistics Canada has a team of 100 "interviewers"across the country, people like Vida Adams, whose full-time job is tracking prices.

We asked if we could tag along with Adams as she checked the prices, but the federal agencyrefused. The data collection, the agency said,is top secret; if the public knew where she was gathering her prices, well, they could anticipate what the CPI would be.So, we met her halfway, and brought Adams a bunch of household goods and asked her to show us how it's done.

We all feel like prices are rising faster than Statistics Canada says they are. It's Adams's job to look past emotion and figure out what actual prices of individual items are doing day to day and month to month.

Shefinds the same brand of the same product, in the same store, at the same time, every month. Checking to see:Is product offereda little smaller, a little bigger?Is it any more or less expensive?"On average, we do about 220 items every month, literally going up and down each aisle," says Adams, a sprightly woman based in Toronto.

And it really is a moving targetpaper towels may be cheaper,but the package is slightly smaller. That gets marked down.

"Our interviewers have to think about that all the time. Because it was chips, then it was cookies and now it's almost everything has changed sizes," Adams says. "The latest, one of our interviewers pointed out, is teabags. It's still 72 bags, but the number of grams have changed. We have to be very careful to record that."

It's not just groceries, Adams checks the prices on clothing, auto parts andeven funerals.

It never stops

Day after day, month after month, she tracks the restless movement in prices, sizes and packaging. After years at this, Adams admits, she hasbecome a pretty wily consumer herself.

"People always ask questions about where they can find something. I usually say, 'I'm with Statistics Canada, I don't work here ... but Aisle 2,'" she says with a smile.

Some of the bigger itemsthat have a big weight because you're spending a lot of money on them, even if it's not that often, if they're declining in price, that can offset a smaller but consistent increase in gasoline that you're buying on a regular basis.- BenjaminReitzes, BMO senior economist

All told, Adams and 99 others compile about 85,000prices each month. Thedata are shipped back to a central server in Ottawa. The numbers are crunched by a computer, then poured over by statisticians.

The prices aren't the only things in constant motion. The Statistics Canadateam is constantly changing its weighting system (what has more statistical importance:a shoe or a car?) and the basket of goods the interviewers are tracking. This month, the agencyupdated the basket for the first time in two years.

Crunching the numbers

All that information is crunched and at the end of the process, the CPI is released as it was Thursdayindicating whether inflation is rising or falling.

It is an enormous, ongoing,statistical undertaking that has been going on, in some capacity, for 100years. And yet, Evans notes, just about everyone says Statistics Canada is getting it wrong.

"Ihear it from my dad. He says, 'Inflation couldn't possibly be running at two per cent....you're doing something wrong over there."

BMOsenior economist BenjaminReitzessays: "It's a persistent problem. I get the same question,"

He explains that the price of many of the smaller things we buy on a day-to-day basis arein fact rising. But he says that's why Statistics Canada's weighting system is so important. The system is built to factor in all prices, including bigger items that may cost a bit less every year, Reitzessays.

"You don't really buy furniture very often, you don't buy computersvery often, you don't buy cars very often. So, some of the bigger itemsthat have a big weight because you're spending a lot of money on them, even if it's not that often, if they're declining in price, that can offset a smaller but consistent increase in gasoline that you're buying on a regular basis."

We are now in an era of low inflation. The Bank of Canada has warned we may even be headed into a short period of deflation or decliningprices. So, in the months ahead, the CPI will be watched more closely than ever.