In my Wednesday inflation text, I ended on a note meant to be optimistic, announcing October’s forthcoming indexation of the Old Age Security Annuity (OAS). Of course, retirees told me that more raises would be better.
Incidentally, I added that we would have to wait until January for the QPP benefits to adjust to the Consumer Price Index (CPI).
How is that calculated by the way?
It’s reader Sylvain who makes me want to clarify the question because I’ve just touched on the subject. I said that the pension will be increased at the beginning of the year based on “Canadian CPI from November 1 (2021) to October 31 (2022). “. It’s unclear.
Sylvain did the math.
“But here it is: the November 2021 index was 144.2, the November 2020 index was 137.7; ie an increase of 4.7%, but the pension was only indexed by 2.7% [en janvier 2022]. Find the mistake… “
consumer price index
First, a word about the CPI. This is an indicator compiled by Statistics Canada based on a basket of basic goods and services. The basket is regularly updated and the methodology is refined over the years. The measure is not perfect, as inflation varies from region to region and from household to household, depending on each household’s consumption habits. Hence sometimes this impression: Are you in the field?
The exercise should nevertheless be rigorous, after all it is an economic factor of primary importance. The CPI sets the direction of monetary policy, it influences financial markets, it influences the indexation of wages and pension plans, and marks the rate of progression of tax tables.
inflation average
In July, the CPI was 153.1. A year earlier it was 142.3. Hence the 7.6% figure announced this week ([153,1/142,3]-1×100=7.58).
Our reader proceeded in the same way in his calculations. He compared the November 2020 CPI to that of 2021 and came up with 4.7%.
However, the indexation of QPP utility is not based on the CPI for the month of November, but on the average of the 12 months between November and October.
As ? We add the indices of each month (November, December, January…) then we divide by twelve to get the average. It is then compared to the average for the previous 12 months.
From November 2019 to October 2020, the average CPI was 136.8. From November 2020 to October 2021 it was 140.5. The calculation above gives us 2.7%, which is the increase QPP recipients achieved in January 2022.
It doesn’t seem like much, especially as it happened when the headlines read: ‘Inflation hits 30-year high’. We must remember that in January 2021 inflation in the country was still only 1%. It only started to take off later that year.
Most of the inflation was suffered mainly in 2022. Therefore, in January 2023 we will see a significant increase in QPP benefits. We will know the level of indexation in November once the CPI for August, September and October is known.
We can already imagine some scenarios. Assume inflation continues to fall, dropping to 7% in August, 6.5% in September and 6% in October (again compared to the same period last year).
Well, retirees would increase their pension by 6.4% in January.
It will certainly be around the one that represents the largest increase in pension since 1984 (6.70%) or 39 years.
Whether this historic leap will attract as much attention remains to be seen.
INDEXATION OF QPP PENSION
2018: 1.5%
2019: 2.3%
2020: 1.9%
2021: 1.0%
2022: 2.7%
2023: (Hypothesis) 6.4%
1982: (Summit) 12.3%