The rising cost of living demands more than benefit indexation

In theory, universal indexation of income benefits should hold the line against rising costs. In practice, however, the story is more complicated.

When a government indexes an income benefit, it automatically increases the benefit amount by the annual rate of inflation. The idea is to make sure that the real-world value of the benefit remains the same as the cost of living rises.

But indexing an inadequate benefit rate does not suddenly make that benefit adequate. If a benefit was too low for someone to escape poverty before it was indexed, it will still be too low after it is indexed.

And there’s more to consider.

Indexation protects people against average price growth. It does not protect against sharper increases concentrated in essential goods.

The federal government knows this. On January 26, it announced new measures to make groceries more affordable, including a temporary Canada Groceries and Essentials Benefit (CGEB) that builds on the existing GST/HST credit. This investment is needed, but it raises an obvious question: If federal benefits are already indexed to inflation, why is a temporary top-up necessary at all?

The government’s backgrounder provides the answer: The new benefit is calibrated to “offset grocery cost increases beyond overall inflation since the pandemic.”

The Consumer Price Index (CPI) reflects the spending patterns of the average household, not those living on very low incomes. Since 2019, overall prices have risen by about 20 per cent, while food and shelter prices have increased by closer to 30 per cent. Statistics Canada data shows that households in the lowest income quintile spent more than 27 per cent of their disposable income on food and non-alcoholic beverages in 2024, compared with just 5 per cent for households in the highest quintile.

In other words, prices of essential goods are rising faster than overall inflation. When that happens, and when low-income households spend a disproportionately large share of their income on those goods, benefits indexed to CPI still fall far behind the real cost of living.

In addition, low-income households have far less room to absorb price shocks. Inflation measures assume consumers can substitute cheaper alternatives when prices rise, but households already purchasing the lowest-cost necessities have nowhere left to trade down. Compounding this, a recent Bank of Canada study noted that lower-priced food products have experienced higher inflation than premium products in recent years. The study’s conclusion gives a stark summary: “Our findings show that Canadian households experience widely different inflation rates. Official statistics on CPI food inflation and CPI total inflation do not show the differences in how Canadian households experience inflation.”

Taken together, these factors mean that even when benefits are indexed to inflation, low-income families are not fully protected.

This reality carries legal as well as moral implications. When Canada ratified the International Covenant on Economic, Social and Cultural Rights five decades ago, our governments committed to progressively realizing the right to an adequate standard of living. That obligation prohibits government from acting, or failing to act, when the consequence is greater poverty, except in cases of severe economic downturn. If we know that indexation is not enough to address the true cost pressure faced by low-income households, then governments are obligated to act rather than allow people to fall deeper into poverty.

One approach would be to develop a low-income CPI for use in indexing benefits. Better measurement is a worthy goal, but this approach risks placing too much emphasis on indexation before we have achieved adequacy. Even if indexation worked as intended, it would only preserve the inadequate supports that exist today, freezing people into the same poverty year after year.

That said, it is good news that the consensus behind indexation is slowly growing. After years of advocacy, the federal government has indexed all its major income supports. More than half of all provinces and territories now index at least some parts of their social assistance benefits. But advocates must not let governments off the hook simply because they have taken this basic step.

At most, indexation is a floor, not a ceiling. Done well, it may prevent backsliding, but it does not build security. It is not enough to protect people from poverty or the rising cost of living. Governments must move beyond preserving inadequate supports and ensure that every person has enough income to afford the essentials we all need.