HomeNEWSNew Zealand’s Consumer Price index – is it accurate enough?

New Zealand’s Consumer Price index – is it accurate enough?

The Consumer Price Index (CPI) measures the change in price of a fixed basket of goods and services bought by Kiwi households – also known as the cost of living.

The CPI has been around since 1914, and a basket that would’ve cost  £1 in 1914 would now amount to about $151.

Published quarterly (except for food prices), the CPI is intended to measure price changes in products over time and monitor New Zealand’s economic performance.

Infometrics senior economist Benje Patterson says the way New Zealand’s CPI is calculated adheres to international best practice.

“The CPI essentially measures pricing of a basket of goods that, from surveys and analysis of household spending patterns, are deemed to be representative of the typical household,” Patterson says.

But just how precise is it? Does it provide an overall reflection of New Zealand’s pricing?

A Statistics New Zealand spokesperson says the CPI is reviewed every three years to ensure accuracy, as household spending patterns differ over time as lifestyles, tastes and incomes change.

“Because of these changes, the CPI needs to be reviewed regularly to ensure it continues to reflect up-to-date household spending patterns.”

As recently as last year, the CPI was reviewed and three changes were made.

Fifteen new items were added, including cider, property valuation services, packaged leaf salad, frozen prawns, plywood, spades, and pets.

 Twelve items were removed, including video cameras, burglar alarms, video cameras, car stereos and ebook readers.

These selections have been made over time to reflect changes in consumer spending, and what items fall in and out of flavour.

This was the case when washing boards and clothes wringers were added in 1924, but taken off in 1949 when washing machines were added.

Another example is hair perms, which were all the rage in 1949 but were taken off in 2006.

As well as this, it was decided items would no longer be priced from Timaru, Wanganui and Rotorua as a cost cutting measure to fund new price indexes.

In the last CPI, Statistics New Zealand collected around 100,000 prices from 2800 retail stores and 2300 other businesses or landlords from 12 areas: Whangarei, Auckland, Hamilton, Tauranga, Napier-Hastings, New Plymouth, Palmerston North, Wellington, Nelson, Christchurch, Dunedin, and Invercargill.

Statistics New Zealand also changed the way it collects prices by introducing handheld tablets for interviewers this year.

Pricing is now done electronically for fruit and vegetables and fuel data, rather than using paper and pens.

Despite adhering to international best practices, there are some aspects of this that pose problems, as the CPI is based on averages.

The most commonly mentioned problems with the CPI include substitution bias, new items added to the basket of goods, and quality changes in goods.

Patterson says though the CPI is reviewed and updated to reflect changes in tastes and availability, the basket of goods in the CPI is not good at showing differences between groups of people.

“For example, a family with two children in Auckland will consume a different bundle of goods to a single person flatting in Wellington, or an elderly couple who have retired to Hawke’s Bay,” he says.

Considering the category sub-indices is more accurate, he says, as you can analyse the price of things in detail, from housing to meat.

Patterson says the CPI is good at showing the average price of things throughout New Zealand, but doesn’t let economists identify specific regional variations in pricing.

“However, this is generally not a huge problem for many consumer goods,” he says. 

“Although differences might persist, generally speaking market forces and the prevalence of nationwide retail chains ensure that pricing for most consumer goods move more or less in sync nationwide. 

“The cost of a pair of Nikes at Rebel Sport in Invercargill as it is in Hamilton.”

He says some goods, such as new housing, may have differences in pricing in different regions.

However, as long are people are aware of these differences between regions, he says it’s okay. 

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