Latest / The Missing Middle Podcast / The Inflation Number You Hear vs. The One You Feel

Transcript

The Inflation Number You Hear vs. The One You Feel · The Missing Middle Podcast

• 0:00
  SPEAKER_01: We don't have one economy anymore.
• 0:02
  SPEAKER_01: We have multiple, often based on when you were born, where people are experiencing it very, very differently.
• 0:07
  SPEAKER_01: And the way our data is reported doesn't always reflect that.
• 0:11
  SPEAKER_02: We may be underestimating the rate of inflation because we're not adequately capturing how consumers are paying more for products, but they're actually getting less because these products are worse than they used to be.
• 0:22
  SPEAKER_00: Classonomics, hosted by Sabrina Mado and Mike Moffat.
• 0:28
  SPEAKER_01: The Bank of Canada regularly asks Canadians how high they think inflation is.
• 0:32
  SPEAKER_01: And not surprisingly, on average, they give higher answers than the official inflation rate.
• 0:37
  SPEAKER_01: Some of this is simply a distrust in government and that we have a stronger emotional reaction when the price of something goes up than when the price of something goes down.
• 0:45
  SPEAKER_01: We're seeing that play out right now with the recent spike in gas prices.
• 0:48
  SPEAKER_01: But there is more to it than that.
• 0:50
  SPEAKER_01: And the general public isn't entirely wrong.
• 0:52
  SPEAKER_01: Part of it has to do with how we measure inflation, that the improvement in the quality of a good is treated the same as a price reduction when they are in fact two very different things.
• 1:02
  SPEAKER_01: But it also has to do with how some prices rise faster than others.
• 1:06
  SPEAKER_01: So the inflation that you experience may differ from my experience.
• 1:09
  SPEAKER_01: And that's not just a housing phenomenon.
• 1:11
  SPEAKER_01: When the Bank of Canada measures inflation and announces that prices rose 2.5% over the last year, how do they actually come up with that number, Mike?
• 1:20
  SPEAKER_02: Yeah, well, the short version of it is that they break down household spending, including both goods and services, into like hundreds of different categories to create a representative consumer spending basket.
• 1:31
  SPEAKER_02: They then track the price of each of those individual goods and services, how those change over time.
• 1:37
  SPEAKER_02: And that basket is weighted by the average total spending of that good.
• 1:41
  SPEAKER_02: So cars are given a higher weighting than, say, golf balls.
• 1:44
  SPEAKER_02: Now the items and relative weightings are updated from time to time as new products and services are introduced and old ones go extinct.
• 1:52
  SPEAKER_02: And the prices of the goods and services are adjusted, or at least they try to adjust to take into account both changes in product size and product quality.
• 2:00
  SPEAKER_02: And it all gets kind of thrown into a blender, and we see how those prices change over time.
• 2:05
  SPEAKER_02: And that gives us the inflation, right?
• 2:07
  SPEAKER_01: Two different families are going to have radically different spending habits, obviously.
• 2:11
  SPEAKER_01: Some may have children who need daycare, others may spend a lot of money traveling or going to restaurants, while others may see most of their paycheck go to the high cost of housing.
• 2:20
  SPEAKER_01: So because everyone's basket of goods and services differs, families will experience inflation very differently.
• 2:26
  SPEAKER_01: Now, do we know which groups are experiencing higher rates of inflation than others?
• 2:30
  SPEAKER_02: Yeah, well, it really does come down to those spending patterns, as you mentioned.
• 2:33
  SPEAKER_02: And Statistics Canada tracks hundreds of different categories of spending, but they divide it into eight basic categories.
• 2:40
  SPEAKER_02: Surprisingly, since 2002, housing, or what the consumer price index calls shelter, has actually not experienced the biggest jump in prices, though that's partly a quirk of how StatsCAN measures housing inflation.
• 2:52
  SPEAKER_02: The biggest jumps have been in the alcohol, tobacco, and cannabis category, along with the food category.
• 2:58
  SPEAKER_02: So on the flip side, the categories of recreation, education, and reading, it's seen relatively modest growth.
• 3:05
  SPEAKER_02: And clothing and footwear has actually experienced deflation since 2002.
• 3:09
  SPEAKER_02: That means that uh prices are lower today than they were back then.
• 3:13
  SPEAKER_02: So overall, these trends have hurt consumers who spend a larger proportion of their paychecks on food and rent, which not surprisingly tends to be lower income Canadians.
• 3:23
  SPEAKER_01: I actually didn't know reading was a category, and this was in the script, but I'm just curious is that books and newspapers and magazines?
• 3:31
  SPEAKER_01: Because that's so broad.
• 3:33
  SPEAKER_02: Yeah, it is.
• 3:33
  SPEAKER_02: So it's books, newspapers, magazines, that kind of thing.
• 3:37
  SPEAKER_02: And yeah, those prices haven't gone up nearly as much as other categories.
• 3:42
  SPEAKER_02: And a lot of that has to do with the fact that there's a lot of competition, online competition, you know, when it comes to news media, newspapers have had to lower their prices.
• 3:51
  SPEAKER_02: You know, we've had online bookstores create a little bit of competition there.
• 3:55
  SPEAKER_02: So kind of shows that you know the market dynamics matter and they affect the rate of inflation that people experience.
• 4:04
  SPEAKER_01: Okay.
• 4:04
  SPEAKER_01: Thank you for satisfying the journalist nerd in me.
• 4:07
  SPEAKER_01: Now back to regularly scheduled programming.
• 4:09
  SPEAKER_01: I would imagine there are large differences within categories.
• 4:12
  SPEAKER_01: There have been all kinds of headlines lately about the skyrocketing price of beef, for example.
• 4:17
  SPEAKER_02: Yeah, exactly right.
• 4:18
  SPEAKER_02: And beef is a terrific example uh because those prices have more than doubled since uh 2002, where say the price of potatoes, it's only up about 50%.
• 4:27
  SPEAKER_02: And obviously, it depends on what time period you're examining.
• 4:31
  SPEAKER_02: So for the last couple of decades, coffee prices have increased at about the same rate as general food inflation.
• 4:37
  SPEAKER_02: And actually, in many years, they've increased slower than the typical food category.
• 4:42
  SPEAKER_02: But last year in 2025, we saw consumer coffee prices jump by about 30%.
• 4:47
  SPEAKER_02: And that's the worst type of inflation of all.
• 4:49
  SPEAKER_02: It's the type that affects me.
• 4:51
  SPEAKER_01: Now, consider someone like you who drinks a lot of coffee, but who isn't an economist like you and doesn't follow the data.
• 4:58
  SPEAKER_01: You go to the supermarket or the local coffee shop and you see prices are way up, you have to be thinking that inflation is absolutely out of control.
• 5:06
  SPEAKER_02: Yeah, that plays a huge role in people's inflation perceptions when they see the price of something that they purchase frequently and those prices have increased a lot.
• 5:14
  SPEAKER_02: You know, there's a certain level of salience there.
• 5:17
  SPEAKER_02: Gas prices, as you mentioned, are another one that most of us pass multiple gas stations every day.
• 5:23
  SPEAKER_02: And then, like most prices in our economy, these ones are like displayed on like really large signs.
• 5:28
  SPEAKER_02: So when gas prices jumped up, it gets noticed, and people believe that's an economy-wide phenomenon that when gas prices in particular go up, inflation perceptions go up faster than actual inflation.
• 5:42
  SPEAKER_02: So when it comes to inflation perceptions, some prices matter more than others.
• 5:46
  SPEAKER_02: And when it's a good you purchase a lot of, like if you're somebody who drives a lot, it also means that your personal rate of inflation is probably higher than the rest of the economy.
• 5:56
  SPEAKER_01: I do know when my fiance and I drive past gas stations, we always comment on the price of gas.
• 6:00
  SPEAKER_01: So that's very true.
• 6:01
  SPEAKER_01: Now you mentioned earlier that Statistics Canada takes into account changes in package sizes.
• 6:06
  SPEAKER_01: So when we see shrinkflation at the grocery store, that's taken into account in the inflation data.
• 6:11
  SPEAKER_02: Yeah, though it is possible that certain examples are missed, but for the most part, I think Statistics Canada does a good job of this.
• 6:17
  SPEAKER_02: They recently reported that from 2021 to 2023, that 30% of the grocery items that they track experience shrinkflation.
• 6:26
  SPEAKER_02: So I think that says a couple things that that one, they're aware of it.
• 6:29
  SPEAKER_02: And two, that shrinkflation is really widespread when, you know, just in a two-year period, 30% of those products or product categories are experiencing shrinkflation.
• 6:39
  SPEAKER_01: I'm a big craft dinner fan, and one box used to feed four people when I was growing up.
• 6:44
  SPEAKER_01: Now one box feeds barely just me.
• 6:46
  SPEAKER_02: I'm uh, you know, a dad of a growing 11-year-old boy, and you know, sometimes you're cracking open that second box.
• 6:53
  SPEAKER_02: So absolutely, that's a that's a big, big issue.
• 6:56
  SPEAKER_02: And I think a lot of people have noticed that.
• 6:59
  SPEAKER_02: That is something that's relatively straightforward for Statistics Canada measure because you know, they they have on the craft dinner box or the coffee container or whatever, you know, they have how many grams it is and so on.
• 7:12
  SPEAKER_02: So they do catch a lot of that.
• 7:13
  SPEAKER_02: But what's harder to accurately measure is how the quality of goods changes for both better and worse.
• 7:19
  SPEAKER_02: So when computers get faster or smartphones get more features, statistical agencies like StatCan, they try to account for that in the data.
• 7:27
  SPEAKER_02: But where I'm a bit skeptical that Stascan is accurately capturing changes in quality is that when when products make subtle changes to reduce quality, like when food companies reduce the quality of their ingredients instead of raising prices.
• 7:43
  SPEAKER_01: Yeah, this is something that seems to happen a lot.
• 7:45
  SPEAKER_01: You know, there's a post on Reddit recently about a mint chocolate ice cream that went from advertising that it has quote unquote chocolate pieces to stating that it has quote unquote chocolate pieces.
• 7:56
  SPEAKER_01: Because they had taken so much cocoa out of that product, it no longer met the legal requirement to call something chocolate.
• 8:03
  SPEAKER_02: Yeah, that's right.
• 8:04
  SPEAKER_02: And that's uh something that really annoys me as someone who enjoys a good bowl of ice cream.
• 8:10
  SPEAKER_02: And I'm skeptical of the ability of any statistical agency to properly account for that, properly account for the fact that you're no longer getting chocolate in your in your chocolate ice cream.
• 8:21
  SPEAKER_02: And I don't think it's because statistical agencies they're not trying.
• 8:24
  SPEAKER_02: They do try and account for this, but it's just really hard to track.
• 8:27
  SPEAKER_02: And given how common these quality downgrades are, makes me believe that we may be underestimating the rate of inflation because we're not adequately capturing how consumers are paying more for products, but they're actually getting less because these products are worse than they used to be.
• 8:43
  SPEAKER_01: I absolutely believe that.
• 8:44
  SPEAKER_01: I'm going to talk about cheese again for a second.
• 8:47
  SPEAKER_01: Craft singles, big fan as well.
• 8:49
  SPEAKER_01: Um, there have been a lot of comments on Reddit there as well about texture changes, how the cheese might melt differently, differences in flavor over the years.
• 8:57
  SPEAKER_01: So it seems like something consumers are noticing, but it's very hard to get any real transparency into that.
• 9:03
  SPEAKER_01: But because this is the missing middle, we can't have an inflation discussion without talking about housing.
• 9:08
  SPEAKER_01: You mentioned that there's a shelter component in the CPI that covers housing, but the actual rate of inflation any family is experiencing must be different depending on where they live or whether they're renters or homeowners.
• 9:19
  SPEAKER_01: Is that the case?
• 9:20
  SPEAKER_02: Yeah, absolutely.
• 9:22
  SPEAKER_02: There are massive differences.
• 9:23
  SPEAKER_02: And, you know, the CPI is done at the national level, but it is also done at the provincial and geographic levels.
• 9:29
  SPEAKER_02: So we do uh account for that.
• 9:31
  SPEAKER_02: And it does mean that inflation can be higher in some provinces or some cities than others.
• 9:36
  SPEAKER_02: But overall, you know, the CPI measures the average family.
• 9:40
  SPEAKER_02: So it finds that basically the average family owns 70% of a house and rents 30% of one, which of course, like no actual family does it does in reality, you know, the same way that nobody has 2.3 kids.
• 9:52
  SPEAKER_02: But, you know, statistically speaking, that was the kind of average in the 80s.
• 9:56
  SPEAKER_02: And as well, the shelter component considers things like water bills and property taxes and so on, and not everyone directly pays those either.
• 10:04
  SPEAKER_02: So there's a lot of variability within that basket.
• 10:08
  SPEAKER_02: And even without taking into account those geographic differences that I mentioned earlier, you know, we can split households into four types, and how they experience shelter inflation is vastly different.
• 10:19
  SPEAKER_02: The first group is you have renters and they have no plan to buy a home soon or ever.
• 10:25
  SPEAKER_02: So they're not directly impacted by changes in home prices or mortgage rates.
• 10:30
  SPEAKER_02: They could be indirectly impacted because they could affect rents, but ultimately it is the changes in rents that they're affected by, not all of these other things.
• 10:40
  SPEAKER_02: The second group is your prospective home buyers.
• 10:43
  SPEAKER_02: And most of them are impacted by rent changes because a lot of them are currently renting, but they're also negatively impacted when home prices go up because they're gonna have to pay more to get that house.
• 10:54
  SPEAKER_02: And they're also negatively impacted when mortgage rates go up, because once they do get that home, that would make their monthly payments higher than it otherwise would be.
• 11:03
  SPEAKER_02: And then you have folks like me who own a home, but we haven't fully paid off that mortgage.
• 11:08
  SPEAKER_02: Unlike the second group, I actually benefit, at least in a financial sense, from home price and inflation.
• 11:14
  SPEAKER_02: We've already purchased the home, it's ours now.
• 11:17
  SPEAKER_02: So if home prices go up 10%, our potential purchasing power actually goes up, not down, because we could borrow against those uh untaxed and unrealized capital gains and so on.
• 11:29
  SPEAKER_02: So that type of price increase, you know, doesn't really affect me that in a way that other types of inflation would.
• 11:37
  SPEAKER_02: It's actually financially beneficial.
• 11:40
  SPEAKER_01: Shocker, Gen X Mike wins again.
• 11:42
  SPEAKER_02: Gen X Mike wins again.
• 11:44
  SPEAKER_02: Well, we were Gen X was due for a win.
• 11:47
  SPEAKER_02: But on the other hand, if mortgage rates go up, we are negatively impacted because you have folks who have variable rate mortgages, so they get hit right away, or fixed rate mortgages that they will eventually renew, in my case, as January 2027.
• 12:02
  SPEAKER_02: So I'm okay for a while, but you know, really kind of hoping those rates go down in the next six months or so.
• 12:08
  SPEAKER_02: And then finally, you mentioned Gen X, you have boomers and silent generation folks like my parents, they own their home, they've paid off their mortgage.
• 12:17
  SPEAKER_02: So rising mortgage rates doesn't impact them at all.
• 12:20
  SPEAKER_02: And it actually means that if other interest rates are going up the same way that mortgage rates are, like the interest paid on savings account, that's a net positive for them.
• 12:30
  SPEAKER_02: So, you know, in my case, interest rates up, that's bad.
• 12:34
  SPEAKER_02: For them, interest rates up, that's good as far as their purchasing power goes.
• 12:38
  SPEAKER_02: So, because that shelter inflation category has wildly different impacts depending on where you are in that kind of spectrum of renting and homeownership, your personal rate of inflation could be much, much higher or much, much lower than what's reported in the news.
• 12:55
  SPEAKER_01: Yeah, it tracks to the theme that we don't have one economy anymore.
• 12:59
  SPEAKER_01: We have multiple, often based on when you were born, where people are experiencing it very, very differently.
• 13:04
  SPEAKER_01: And the way our data is reported doesn't always reflect that.
• 13:08
  SPEAKER_01: Thank you so much, everyone, for watching and listening.
• 13:10
  SPEAKER_01: And thanks to our producer, Meredith Martin, and our editor, Sean Foreman.
• 13:14
  SPEAKER_02: And if you have any thoughts or questions or advice on somebody who has a mortgage renewing, please send us an email to missing middle podcast at gmail.com.
• 13:24
  SPEAKER_01: And we'll see you next time.