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Difference between Housing Prices Index and Consumer Price Index
Numerous price indices are utilized to either immediately or indirectly have an impact on economic policy. Housing Price Indices and Consumer Price Indices are examples of such indices.
The Consumer Price Index (CPI) is one of the indicators that may be used to monitor inflation. Having said that, one of the most important components of the CPI market basket is shelter, which refers to the service that residents of housing units receive from their homes.
However, it is necessary to bring to your attention the fact that housing units are not included in the CPI market basket. Instead, housing units are seen as capital investments rather than units of consumption.
Let's take a look at the difference between the Consumer Price Index and the Housing Price Index.
What is Housing Prices Index?
The House Prices Index is a measurement of fluctuations in the cost of single-family homes in Canada. The Home Prices Index is a useful tool for estimating prepayments, mortgage defaults, and housing affordability. It also serves as an indication of movements in the housing market and acts as an indicator of housing market developments. It is also possible to utilize the growth and fall of housing prices as an indicator of probable changes and economic developments in the stock market.
Transactions involving compliant and traditional mortgages on single-family residences make up the bulk of the data used by the authorities to compile the Housing Prices Index. The Housing Index in Canada rose from 118.50 points in September 2021 to 119.60 points in October 2021, indicating a rise in the housing market. This represented a rise of 0.4 percent overall.
Consumers' confidence is boosted as real estate values go up, which in turn inspires further consumer trust. This contributes to an increase in GDP as well as the growth of the economy. On the other hand, a fall in housing prices boosts market confidence and may even cause a recession to begin.
What is Consumer Price Index?
It might be challenging to keep tabs on the spending habits of everyone in a country. Hence, countries create a "virtual basket" and fill it with a certain amount of the types of services and items that their citizens normally buy in order to gain an idea of the typical shopping behavior of every home.
The Consumer Price Index (CPI), which is one of the gauges of inflation, represents the public's typical retail experience. It takes into account a variety of things that are in the basket, such as a place to live, food, the costs of running a household, mode of transportation, household appliances and furniture, medical and personal care, clothing, travel, sports and leisure, and recreational items like alcoholic beverages and tobacco.
The amount of money that households spend on a particular item is one of the factors. In Canada, for example, the average household spends more money on rent and groceries than on services like getting their hair cut. This indicates that the provision of food and shelter is given greater importance than the provision of personal care services. A rise in the price of products that have a larger weight has a more substantial influence on the average cost of living for every family because of the increased weight of such items.
The Consumer Price Index is a common and straightforward method for calculating inflation. Employers can also utilize this data to make modifications to employees' pay and compensation. It is observed that governments make changes in their social benefit schemes and income taxes based on the CPI data.
CPI is calculated relative to the base year, with the basket having a value of $100 in the base year. As an illustration, a basket of services and commodities that cost $100 in the base year of 2010 would cost $140 in the year 2020. This demonstrates an inflation rate of $40.
CPI is the most widely used indicator of inflation; nevertheless, it does have certain shortcomings. Some of these can be attributed to the following −
- The pace at which individuals' purchasing behaviors are subject to change. When there is a rise or drop in pricing, customers' purchasing patterns shift. The basket does not always reflect these changes when they are made.
- Technological progress is to blame for the deterioration in quality, which has occurred over the course of recent years. For instance, the swift advancements in electronics and computer technology over the course of time have the effect of bringing the prices of these items down.
- The release of innovative items into the marketplace. Government normally update their CPI basket once every two to three years. As a consequence, it does not take into consideration any items that have been launched in the market in the intervening years.
- There is a possibility that the CPI will not cover the internet purchasing marketplaces, which often have lower pricing than traditional businesses.
- The Consumer Price Index (CPI) does not perfectly correspond to the True Cost of Living Index (COLI).
Differences between Housing Prices Index and Consumer Price Index
The following table highlights the major differences between Housing Prices Index and Consumer Price Index: −
| Characteristics | Housing Prices Index | Consumer Price Index |
|---|---|---|
| Definition | The fluctuations in the prices of single-family homes in Canada are measured using an index called Housing Prices Indices | CPI is a statistic that may be used to determine inflation. |
| Considerations | The only thing that the Housing Price Indices track is house prices | CPI monitors the cost of a variety of goods that are included in the bundle. These goods include food, home, daily expenses, transportation, home furnishings and appliances, medical and personal care, clothing, travel, sports and leisure activities, and alcoholic beverages and tobacco products. |
Conclusion
Only housing prices are tracked by the Housing Prices Index. On the other hand, the Consumer Price Index monitors a variety of products that are included in the basket. These products include housing, food, household expenses, transportation, appliances and furniture, medical and personal care, clothing, travel, sports, and leisure, as well as leisure products like alcoholic beverages and tobacco. Despite the fact that housing costs are not included in consumer price indices, it is crucial to keep in mind that the two are connected.
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