Using an Engel Curve Approach to Infer Cost of Living Experienced by Canadian Households

Abstract

We use Survey of Household Spending data for 1997–2015 and apply an Engel curve approach to infer how well the all-items Consumer Price Index (CPI) represents the cost of living experienced by Canadian households. We find that the CPI understates the cost of living for households before 2010. After 2009, the CPI overstated the cost of living of households, suggesting that post-recession real incomes were higher than suggested by CPI deflated incomes. Although this result aligns with those of other studies, this silver lining of recession interpretation shows that the Engel curve approach should be used with caution after economic shocks.