This article states that the core inflation rate in August slumped as tepid consumer prices added to the disappointing economic signs that have dogged the country. This lesson plan aims to illustrate the effects of a low inflation rate on the Canadian economy.
Appropriate subject areas:
Key Questions to Explore:
- What is inflation? How is it measured?
- What is the consumer price index?
- What impact does a fall in the Canadian dollar relative to the US dollar have on trade between the US and Canada?
- In the most recent interest-rate decision in early September, the Bank of Canada said inflation risk had “tilted somewhat to the downside since July.” What impact could this have on future interest rates?
- Why are food and energy removed from the so-called basket of goods in the core inflation measure?
Inflation, consumer price index.
- Inflation: Inflation is a sustained increase in the general level of prices of goods and services. Inflation is measured by Statistics Canada, primarily through the consumer price index.
- Consumer Price Index: The CPI is an economic indicator of changes in consumer prices experienced by Canadians. It is obtained by comparing the cost of a fixed basket of goods and services purchased by consumers over time. The CPI is widely used as an indicator of change in the general level of consumer prices or the rate of inflation.
A copy of the article
Introduction to lesson and task:
In August, Statistics Canada reported that Canada’s CPI for August was 1.1%. But the core inflation measure, which excludes the eight most volatile components of CPI, was 1.8%. The expected overall CPI was 1.4% and the expected core inflation measure was 2.0%. This disparity between the actual and expected figures suggests that prices are rising more slowly than expected, most likely due to lower than expected levels of demand in the Canadian economy.
The less than expected increase in the CPI makes it less likely that Bank of Canada will raise interest rates any time soon; the nominal interest rate is the sum of inflation and real interest rate.
In fact, in early September the Bank of Canada said inflation risks had “tilted somewhat to the downside.” A decline in inflation rates will increase the likelihood of interest-rate cuts in the coming months.
Finally, the article states there was a retail sales slip in July and that the Canadian dollar fell half a cent against the US dollar.
This lesson plan will explore the effects of inflation, low interest rates, and a slightly devalued Canadian dollar on individuals within the Canadian economy.
Action (lesson plan and task):
- Hand students a copy of the articles.
- Ask them to state what their key takeaways from the article was.
- Tell students that inflation is rising at a lower than expected rate. That is, on average the prices of goods and services are not rising by much, year-over-year
- Ask students to indicate, through a show of hands, if they believe this is a good or bad thing.
- Divide your students into groups based on their suggested answer. (Yes group vs. No group)
- Ask each group to provide the reasoning behind their answer.
- Example: Argument for Yes: Price of goods remain stable, year-over-year. No: It suggests that there is less demand for goods and services.
|Yes (good thing)||No|
|Good for consumers: Prices of goods and service remain stable, or change by a small amount, year over year||Bad for economic growth: Low inflation suggests that there is less demand for Canadian goods and services|
|Good for exporters: Low inflation will make Canadian goods and services more attractive in the international markets||Bad for employees: Low inflation leads to lower wage growth.|
Ask students to state why they think volatile components of CPI like food and energy are stripped out of the core inflation measure. (Answer: To offer a true reflection of the level of increase in the prices of goods and services. Note: commodity prices are more likely to be affected by factors other than supply and demand — e.g. speculation, cartel price fixing, etc.)
Tell students that Canada’s retail sales for July were down 0.1% from June. Ask them to suggest some reasons why this could have occurred. (Because Canadians were willing to spend less on retail goods and services in July.)
Consolidation of learning:
- The Canadian dollar fell half a cent against the US dollar according to Statistics Canada. Ask students to state some implications of this. (It costs less for Americans to purchase US goods. As a result, Canadian goods are more attractive to Americans. On the flip side, American goods are now more expensive for Canadians. This is good news for companies who export finished goods to the US, but bad news for companies who import raw materials from the US)
- By the end of this lesson plan, students should have a better knowledge of inflation and the effects it has on the Canadian economy.
- The travel component of the CPI fell by 0.8% in July. Ask students to explain why a relatively high Canadian dollar might discourage tourists from visiting Canada. (Because it is more expensive)