Question

Since Covid-19 some interesting and unusual things have been happening with Canada's inflation rate. What is indicated by CPI? What is indicated by GDP deflator?

Answer 1

                               Consumer Price Index [CPI] is a measure of the weighted averages of the prices of basket of consumer goods and services. It considers a pre-defined basket of goods and services and hence evaluates the changes of each good and service in the market for analysis. The CPI is further used to evaluate the standard of living of the society as the basket contains the basic needs for a living. It is also used to evaluate the inflation and deflation levels and its effects on the economy. The purchasing power of a currency can also be evaluated with the measure of CPI in the international economy. While the CPI measures the price changes of retail goods, it does not include items like savings and investments and spending by the foreign visitors in an economy.

                                    The GDP deflator is the ratio of value of goods and service in an economy in the current year and current prices to that of the base year. Thus, GDP deflator is a measure of inflation within an economy. Since it makes comparisons of the current year with the base year, it is a representation of the level of prices of all new domestically produced final goods and services of an economy in a year. Like CPI, GDP deflator can also be used as a measure of inflation or deflation of an economy within a year. But unlike the CPI, GDP deflator does not depend on a fixed basket of goods and services as the basket is expected to change depending on the consumption and investment patterns of the people within the economy.

                                           With the spread of Covid-19 across the globe, the overall inflation and growth rates have been showing a declining trend which has caused considerable effects on the CPI and GDP deflator values. The GDP deflator has increased owing to a decrease in the inflation levels when compared to the previous levels. The price levels have fallen and thus the CPI has also fallen to 135 points in Canada. The GDP deflator has also reached a record high of 111.7 point in the recent quarter due to the effects of the crisis on the economy of Canada. Thus, the statistics shows that the overall price levels have fallen and the inflation have fallen within the economy of Canada as it has happened to most of the nations across the globe threatening of a heavy global recession in the near future.