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The new Consumer Price Index basket was noticeably influenced by abrupt changes in how Canadians spent amid COVID-19.Mark Blinch/Reuters

The cost of housing will have a larger influence in how Canada’s main gauge of inflation is tallied, following the home-buying frenzy of the past year and other pandemic-driven shifts in consumption.

On Wednesday Statistics Canada unveiled updates to how it weighs the Consumer Price Index, a critical indicator that is used by the Bank of Canada to set its monetary policy. CPI tracks the cost of a fixed “basket” of goods and services, wherein each item is assigned a weighting based on the consumption of Canadian households.

Why inflation numbers fail to capture Canada’s red-hot housing market

The weightings are typically updated every two years, and one was initially slated for February of this year based on 2019 consumption. However, Statscan delayed the update until now to account for pandemic shifts in consumer spending in 2020. The updated basket will take effect in the June CPI report, released next week.

“Although 2020 expenditures represent an unusual period, the shifts in spending due to the pandemic may lead to more permanent changes as remote work becomes more common, consumers increasingly rely on online shopping and households direct a relatively higher share of expenditures to shelter costs,” Statscan said.

Indeed, the new CPI basket was noticeably influenced by abrupt changes in how Canadians spent amid COVID-19.

The shelter component of CPI – which includes both owned and rented housing, along with other expenses – will comprise 29.8 per cent of the basket, up from 26.9 per cent. Most of that increase is due to a sharp uptick in spending on real estate commissions and legal fees, owing to record transactions across the country.

Moreover, with so many people stuck at home in the pandemic, there was ample spending on furniture and other improvements, elevating the household operations component to 15.2 per cent from 13 per cent.

On the other hand, transportation will have a weighting of 15.3 per cent, down from 19.7 per cent, the largest decline in the eight major components. Statscan said there were “significant decreases” in spending on passenger vehicles and air travel. Clothing and footwear will drop to 4.1 per cent from 5.4 per cent.

A key question is how a CPI basket tied to 2020 pandemic spending will affect inflation statistics as COVID-19 wanes and consumer behaviour potentially pivots again.

For instance, if inflationary pressure builds in the vehicle market, where production has been constrained by the global semiconductor shortage, the effect would be dampened somewhat by its lesser influence on overall CPI.

“It’s like an over-quoted Wayne Gretzky thing: ‘Skate to where the puck is going, not where it’s been,’” said Royce Mendes, senior economist at CIBC Capital Markets. “This is sort of like skating to where the puck has been.”

Statscan was stuck in a tough position, Mr. Mendes said, by having to update its basket weights at a time of rapidly changing consumer habits.

The agency said another update will take place in 2022 and occur annually, rather than every two years.

Canada’s annual inflation rate rose by 3.6 per cent in May, the highest pace in a decade. The Bank of Canada raised its inflation forecast last week and now expects CPI to remain above 3 per cent for the rest of 2021.

For some of the pandemic, Statscan published an adjusted inflation index to account for COVID-19 shifts in spending, and which showed that inflation was running somewhat higher than officially reported.

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