In 2022, prices in Canada rose 6.8% on average, the biggest yearly jump in about 40 years (Statistics Canada). If your pay stayed the same that year, the same paycheque bought less food, less gas and fewer bus rides than the year before. Money decisions like this come up all the time: should you buy a monthly transit pass or pay per ride? Is the $35 pair of headphones cheaper than the $90 pair? How much would something from your parents' childhood cost today? Each of these is a math problem built from percents, rates and comparisons, and this lesson gives you the tools to answer them with numbers instead of guesses.
Inflation and purchasing power
Inflation is a general rise in prices across the economy over time. When prices rise, each dollar buys less: the purchasing power of a dollar falls. Inflation is an average, so in a year of inflation some prices rise a lot, some barely move, and some can even fall. The opposite, a general fall in prices, is called deflation. The Bank of Canada aims to keep inflation close to 2% per year, the midpoint of a 1% to 3% target range, because low and steady inflation makes it easier for families and businesses to plan.
The Consumer Price Index: pricing one basket
Statistics Canada measures inflation with the Consumer Price Index (CPI). Picture one giant shopping basket that holds what a typical Canadian household buys: food, rent and other shelter costs, transportation, clothing, household items, health and personal care, recreation and more. Every month the prices of the items in that basket are checked. The CPI compares the basket's cost to its cost in a base year. Canada's CPI uses 2002 as the base year and sets the basket's 2002 cost to 100. So an annual average CPI of 160.9 for 2024 means the basket that cost $100 at 2002 prices cost about $160.90 in 2024: prices rose about 60.9% over those 22 years. (The contents of the basket are updated every so often as spending habits change.)
| Year | CPI, annual average (2002 = 100) | Change from the year before |
|---|---|---|
| 2020 | 137.0 | not shown |
| 2021 | 141.6 | +3.4% |
| 2022 | 151.2 | +6.8% |
| 2023 | 157.1 | +3.9% |
| 2024 | 160.9 | +2.4% |
| 2025 | 164.2 | +2.1% |
The CPI turns inflation into two quick calculations. The inflation rate between two years is a percent change, so divide the change by the old value. To find what a price from one year is "worth" in another year, multiply it by the ratio of the two CPIs. Round money to the nearest cent at the end. Two years of inflation combine by multiplying, just like any two percent changes in a row: from 2021 to 2023 the index went from 141.6 to 157.1, a rise of about 10.9%, not . (Multiplying the rounded yearly rates, , gives about 11.0%; the small difference comes from rounding.)
Needs, wants and opportunity cost
A need is something you must have to live safely and meet your responsibilities. A want is something that makes life better but that you could go without. The line depends on the situation: a basic phone can be a need for someone whose job depends on it, while the newest model is a want. Every dollar spent on one thing is a dollar you cannot spend on something else or save. What you give up is the opportunity cost of your choice: spending $60 on a concert ticket might mean $60 less toward a bike you are saving for.
- Rent or housing costs
- Basic groceries
- A warm winter coat in Ontario
- Transportation to school or work
- Prescription medicine
- Concert or game tickets
- Eating out
- The newest phone model
- Extra streaming services
- Designer clothing
Comparing options with math
To compare two options fairly, put them on the same basis: the same time period (cost per month, per year), the same amount (cost per use, per ride, per 100 g), and the same taxes (include the 13% HST on both if both are taxed). For example, a $90 pair of headphones that lasts 4 years costs dollars per year, while a $35 pair that lasts 1 year costs $35 per year. The pricier pair is cheaper per year of use, as long as it really lasts. Money is not the only factor: time, convenience and risk matter too, but the math tells you what each option really costs.