Alcoholic beverages and tobacco in the CPI

This article explains the sources and methods used to compile the alcoholic beverages subgroup and the cigarettes and tobacco subgroup of the consumers price index (CPI). Alcoholic beverages and tobacco had a combined expenditure weight of 6.76 percent in CPI at the June 2008 quarter.

Position in the CPI structure

The alcoholic beverages and tobacco group of the New Zealand Household Expenditure Classification represented 6.76 percent of the CPI at the June 2008 quarter. The alcoholic beverages subgroup represented 4.62 percent and the cigarettes and tobacco subgroup represented 2.15 percent.

Within the cigarettes and tobacco subgroup, cigarettes made up about two-thirds of the subgroup, and tobacco about one-third at the June 2008 quarter. Within alcoholic beverages, about one-third is for consumption on licensed premises and about two-thirds is for consumption off licensed premises.

Expenditure weight estimation

This section explains how the expenditure weights for alcoholic beverages and tobacco were estimated.

While the primary source of expenditure information for the CPI is the Household Economic Survey (HES), respondents to the survey tend to under-report expenditure on alcoholic beverages, and cigarettes and tobacco, so alternative information sources are needed for calculating CPI expenditure weights. Statistics New Zealand Alcohol Available for Consumption statistics for 2006/07 and the Statistics NZ Tobacco Available for Consumption statistics for 2006/07 were used to base the 2008 weights on.

Expenditure estimates for alcoholic beverages were calculated by multiplying the quantities available for consumption in the year to June 2007 by average prices derived from the CPI price collections and from supermarket scan data obtained from the Nielsen Company. The quantities were split into beverages consumed on and off licensed premises, using industry information (beer) and information from the HES (wine, and spirits and liqueurs). This step is important, given that prices for alcoholic beverages consumed on licensed premises are much higher than for those consumed off licensed premises. The beer information was available in quantities, but the HES breakdown by storetype related to expenditure shares, so spending on wine, and spirits and liqueurs had to be converted to quantity shares using corresponding average prices.

Adjustments were made to exclude out-of-scope expenditure from international tourists, businesses, and people living in non-private dwellings. Further adjustments were made to reflect growth from 2006/07 to 2007/08 in volumes of ready-to-drink spirits (up about 12 percent over and above population growth).

Expenditure estimates for cigarettes and tobacco were calculated by multiplying the quantities available for consumption in the year to June 2007 by corresponding unit prices derived from supermarket expenditure and quantity scan data. CPI price collection information indicates that cigarette and tobacco price levels vary little between different storetypes. Adjustments were made to exclude out-of-scope expenditure from international tourists and people living in non-private dwellings.

Item and sample selection

The sample of outlets that prices are collected from for alcoholic beverages, and cigarettes and tobacco was last reselected as part of the 2006 CPI review. Prices are collected for wine and beer from supermarkets and beer, wine, and spirits and liqueurs at liquor store chains, smaller independent bottle stores and wine shops, and bottle stores attached to pubs. Notable was the increased sampling of specialist wine stores. Wine and beer prices are not available from supermarkets in Invercargill, where alcoholic beverage sales are controlled by the Invercargill Licensing Trust.

As part of the 2006 CPI review, the pricing specification of the cigarettes and tobacco items in the CPI basket were reviewed. Nielsen Company scan data was used to review the brands in the sample of representative cigarette and tobacco brands and pack sizes (which represent different market segments). An analysis of price change showed that there were only minor differences over time between different brands of cigarettes, so the number of brands in the sample was reduced while continuing to represent different market segments.

For alcoholic beverages, the pricing specification of the items in the basket were updated following analysis of different pack sizes, size and material of container, and variation of each of these at different outlet types.

Price collection

Prices are collected monthly for alcoholic beverages, and for cigarettes and tobacco. Prices collectors from Statistics NZ personally gather alcoholic beverage prices and cigarette and tobacco prices from outlets within the 15 main urban areas during a week-long period that ends around the mid-point of each month.

Prices for alcoholic beverages consumed on licensed premises are collected from about 70 hotels, taverns or bars and 20 licensed clubs. The price of a bottle of wine to accompany a meal is also collected from about 115 restaurants. Prices for alcoholic beverages consumed off licensed premises are collected from about 70 supermarkets, 20 wine stores, and 60 liquor stores. For cigarettes and tobacco, prices are collected from about 75 supermarkets and 50 convenience stores (with half being service stations and the other half being dairies, grocery stores, and superettes).

Estimation

For the calculation of the alcoholic beverages and tobacco indexes, and cigarettes and tobacco indexes, prices collected monthly are first averaged to obtain quarterly prices. This ensures that prices in any particularly month do not have undue influence on quarter-to-quarter price comparisons.

The method for calculating these averages is to obtain monthly regional average prices for each item by weighting the prices collected at different outlets within each region by weights that reflect the relative importance of different types of outlets. The monthly regional average prices are used to calculate quarterly regional average prices by weighting each monthly regional average price by the number of days in the month in which it was collected. All the regions are aggregated to obtain the New Zealand quarterly index by weighting together regional price movements from the price reference (ie June 2008) quarter to the current quarter, using the regional population shares.

Since prices are collected three times each quarter, a price change that occurs in the second or third month of a quarter is reflected only partly in that quarter, with the remainder being reflected in the following quarter.

Quality assurance

Changes to the quality of items that are priced are adjusted for. The most common changes are quantity specials, such as a cheaper 15-pack than the 12-pack of the same brand. These quantity specials are shown as price decreases when the discount occurs and price increases when it is removed. Over time, a movement towards smaller container sizes has occurred, such as beer cans and bottles moving towards the current 330ml standard container size. For instance, if a can of beer contained 355ml in November but decreased to 330ml in December and a dozen cans had a shelf price of $18.90 in both November and December, its price for December would be adjusted in the CPI by a factor of 355 over 330. This calculation would raise its price in the CPI from $18.90 in November to $20.33 in December (up 7.6 percent).

External influences on prices

Prices for alcoholic beverages, and cigarettes and tobacco are influenced by excise duty. Rates of, and changes to, excise duty for alcoholic beverages, and cigarettes and tobacco are published on the New Zealand Customs Service website.

Up until 2008, the annual indexation of excise took place on 1 June for alcoholic beverage and 1 December for cigarettes and tobacco. From 2008, the annual indexation of excise duty on cigarettes and tobacco, and alcoholic beverages has occurred on 1 January and 1 July, respectively. That is, the annual indexation of cigarettes and tobacco occurred on 1 January 2008, rather than 1 December 2007. If a change to excise occurs in the first month of a calendar quarter, then all of the change is shown in that quarter. If a change occurs in the third month, one-third of the change is shown in the quarter the change occurs, with the remainder in the following quarter.

In addition to the annual indexation of cigarettes and tobacco that occurred on 1 January 2010, the first of three annual rises to excise duty on cigarettes and tobacco came into effect on 29 April 2010, as set out in the Excise and Excise-equivalent Duties Table (Tobacco Products) Amendment Act 2010. The rate of excise on cigarettes rose by 10 percent, while excise on tobacco rose 25.4 percent. The Act schedules two further rises of 10 percent for 1 January 2011 and 1 January 2012.

Available time series

As well as time series at the group, subgroup, and class level, alternative aggregations for alcoholic beverages consumed on licensed premises, and for alcoholic beverages consumed off licensed premises, are also available. These indexes are available on Infoshare under the category 'Selected Quarterly Groupings for New Zealand' within the CPI subject, within 'Economic Indicators'.

Weighted average retail prices are published for two beer items (one on licensed premises and one off licensed premises), one wine item, one whiskey item, and a packet of 25 cigarettes. These prices are published in table 5 of the quarterly CPI release and are also available on Infoshare.

A number of CPI exclusion-based measures are also available. These measures include the CPI 'all groups less the alcoholic beverages and tobacco group', CPI 'all groups less alcoholic beverages subgroup' and the CPI 'all groups less cigarettes and tobacco subgroup'.

The tradable and non-tradable nature of alcoholic beverages and tobacco

Tradables are goods and services that are imported or that are in competition with foreign goods and services either in domestic or foreign markets, while non-tradables are goods and services that do not face foreign competition.

The current way that alcoholic beverages, and cigarettes and tobacco are classified within the tradable and non-tradable components of the CPI is detailed below:

• within the non-tradables index: beer (both on and off licensed premises), wine consumed on licensed premises, spirits and liqueurs consumed on licensed premises, cigarettes and tobacco
• within the tradables index: wine consumed off licensed premises, spirits and liqueurs consumed off licensed premises.

 

Due to the significant service component of prices for alcoholic beverages consumed on licensed premises, all alcoholic beverages consumed on licensed premises are classified as non-tradable.

For alcohol beverages consumed off licensed premises, beer is classified as non-tradable, whereas wine, and spirits and liqueurs consumed off licensed premises are classified as tradable. At the time of classification, the domestic beer industry was subject to relatively low levels of imports and exports, suggesting a non-tradable classification as there is little significant foreign competition faced by domestic producers. Also, the price of beer consumed off licensed premises changed broadly in line with changes in excise duty. However, wine, and spirits and liqueurs had relatively high exports and/or imports, suggesting a tradable classification.

Cigarettes and tobacco were classified as non-tradable due to low import and export volumes, for both processed and unmanufactured, relative to total industry output. As well as the low traded volumes, cigarettes and tobacco have retail prices that include a large excise duty component. While the volumes of cigarettes and tobacco manufactured in New Zealand have subsequently fallen sharply, the amount of excise duty represents a large component of the retail price. At the December 2009 quarter, for a packet of 25 cigarettes, the excise component represented around 65 percent of the packet price before GST is added.

More information on the classification of alcoholic beverages, and cigarettes and tobacco in the tradables and non-tradables indexes can be found in the information paper, Consumers Price Index Tradable and Non-tradable Series, available on the Statistics NZ website.

 

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