Public sector fuels inflation

Reviewing trends in inflation can provide useful insights into the evolution of the larger economy.

Consumer price inflation in B.C., as computed by Statistics Canada, averaged 1.6 per cent annually over the past two decades.

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This annual rate translates into a 38 per cent increase in the cost of living over the past 20 years, as measured by the consumer price index (CPI).

But the aggregate number hides important details. As consumers know, the prices of some goods and services have risen substantially, while other items have seen stable prices or - in some cases - price declines. Generally, price increases have been bigger for services and non-durable goods than for durable and semi-durable products.

Durable goods are manufactured items that are used repeatedly or continuously. Most are imported into the province. Growing international trade, the development of complex global supply chains, the rise of China as a manufacturing powerhouse and productivity gains in manufacturing have all contributed to lower overall durable goods prices.

Semi-durable goods don't last as long as durable products. Examples include clothing, footwear and household textiles. Inflation in this category has been muted, with the CPI subindex for semi-durables rising just 10 per cent over the past 20 years.

Items that are commonly consumed within a year are classified as non-durable goods.

Food and gasoline are examples. The non-durable goods subindex has seen the largest price rise - about 60 per cent - among the three goods subindexes in the CPI, mainly due to food and gasoline, which have witnessed sizable price hikes.

If these two categories are stripped out, prices of the remaining basket of non-durable goods are essentially flat over the past two decades.

Collectively, prices for the services captured in the CPI are up by approximately 45 per cent since the late 1990s. The services with the biggest price increases include water consumed by households, local property taxes, home insurance and tuition.

The price for water services delivered by municipalities has soared by more than 200 per cent since 1998.

Property taxes are also an area of dramatic price escalation. The property tax index in the CPI measures changes in the taxes levied on a constant sample of dwellings in selected municipalities. This sample is used to estimate the average increase in property taxes by community, with weighted averages used to determine the increase at the provincial level. With jurisdiction over both water services and property taxation, municipalities can step to the front of the line as the source of some the largest percentage increases in living costs for B.C. residents.

Digging deeper into the data, we learn that prices for home entertainment products have fallen by half in the last two decades. The cost of home appliances is also lower. Clothing costs for a representative B.C. household have declined slightly while footwear prices are up a bit.

Something that may surprise readers is that the price of a vehicle is essentially unchanged from 1998.

In tabulating the CPI, Statistics Canada attempts to identify pure price effects and avoid capturing price changes that reflect quality improvements. For items like cereal, flour or gasoline, this is straightforward because there is little change in quality over time. But with a vehicle, quality improvements are significant and frequent.

The CPI boffins try to adjust for such quality improvements. So what the CPI is really saying is that after taking quality improvements into account, the price of a typical vehicle sold in B.C. today is basically the same as in 1998.

Finally, prices for food bought from stores and restaurants have risen steadily and outpaced the average rate of inflation.

Consumers are also paying significantly more for home insurance. Of interest, beer drinkers are paying substantially more for their beverages while the price of wine has remained more or less flat over the past two decades.

In general, goods and services provided or controlled by the public sector have had above-average price and cost inflation, while those produced and sold under competitive market conditions have seen less pronounced upward price pressure as well as greater improvements in quality. That won't come as a shock to those who believe in the power of competitive markets to keep producers on their toes and cater to the preferences and interests of consumers.

-- Jock Finlayson is the Business Council of British Columbia's executive vice-president and chief policy officer. Ken Peacock is the council's chief economist.

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