Price indexes measure the changing cost of a basket of goods and services. The consumers price index (CPI) basket of goods and services is reselected once every three years and is held fixed between the three-yearly reviews. When there is a change in the size or quality of any of the goods or services in the basket, an adjustment is made to ensure that the price change shown in the CPI is not affected by the change in size or quality.
Every quarter, Statistics New Zealand’s price collectors visit over 3,000 shops around New Zealand to collect prices for the CPI. In addition, they also check for changes in product sizes or features. Shelf prices are adjusted to remove the effect of these changes on the CPI.
The CPI calculation method has the effect of adjusting the price of the product that has changed to match the size or features of the previous product. For instance, if a can of spaghetti weighed 420g in November but decreased to 400g in December and had a shelf price of $1.50 in both November and December, its price for December would be adjusted in the CPI by a factor of 420 over 400. This calculation would raise its price in the CPI from $1.50 in November to $1.58 in December (up 5.0 percent).
The same method is applied to items that increase in size. For example, a 900ml bottle of dishwashing liquid in November might have had a ‘10 percent free’ promotion in December, so that its volume rose to 990ml. The product also had a fall in shelf price, from $3.00 in November to $2.50 in December. Because of the added volume, the CPI would show a greater price decrease than the actual $0.50 drop in shelf price. In the CPI, the cost of this item would fall from $3.00 to $2.27 ($2.50 multiplied by a factor of 900 over 990), which is a fall of 24.2 percent. When the product returns to its previous volume, this calculation would be reversed while also incorporating any change in shelf price.
Adjustments are also made for changes in the quality of goods and services. New cars are a good example. When a new model is introduced, the head offices of car distributors are contacted to ask about any changes to the models, including the addition or removal of features. The previous and new models are then compared and the distributors are asked to provide a ’perceived’ dollar value from a customer's perspective for each new, altered, or removed feature. These values are compared with previous cases to ensure they are broadly consistent. The perceived values are then either added to (if the feature has been removed) or subtracted from (if the feature has been added) the current price of the new model to remove the effect of the quality change.
For example, let’s compare a new car model that costs $25,000 in the December quarter and a previous model at $24,000 in the September quarter. The new model has an added Bluetooth hands-free phone capability feature that has a perceived value of $300. So that the two models can be compared, $300 would be taken off the purchase price of the new model, assuming this new model is in all other aspects identical to the previous one. The price change for this vehicle would be the difference between the cost of the old model ($24,000) and the new one minus the additional feature ($24,700). The calculation would result in a 2.9 percent price increase in the CPI for this vehicle.
Some recent size changes
A number of grocery items in the CPI basket have had size changes during the past two or three years. Examples of these include drinking chocolate, breakfast cereals, muesli bars, potato chips, chocolate, crackers, paper tissues, and toilet paper.
Some recent size adjustments made in the CPI are described below. It can take a while for the full effect to be shown, as the changes are made when the new products replace the old ones on shop shelves.
In August and September 2009 the packet sizes of some corn-based breakfast cereals were reduced by about 12 percent. While this reduction was associated with a fall in shelf prices for each of the products being tracked for the CPI basket, the price reduction for these cereals did not fully offset their fall in packet size. Subsequently, the price change shown in the CPI for these cereals ranged from increases of 1.8 to 8.7 percent.
Between 2007 and 2009 there were reductions in the number of tissues in boxes for many brands, with the decreases ranging from about 6 to 30 percent. A range of circumstances accompanied these reductions:
- In some cases, there was a special price in the month of the change. These showed price reductions in the month of the change (after adjusting for the number of tissues), followed by price increases in later months.
- For some, shelf prices increased in the same month as the size change, lifting the price further when the reduced size was taken into account. For these cases, reasonably large price increases were recorded in the CPI.
- There were also instances of shelf prices remaining unchanged in the month of the size change. After adjusting for the reduction in the number of tissues, the result was an increase in prices shown in the CPI, although not to the same extent as those that also had shelf-price increases.
In mid-2009 the size of some chocolate blocks reduced by up to 24 percent. As with boxed tissues, the reductions were under instances of:
- special prices before and/or after the introduction of the new sizes
- the same shelf price before and after the size change
- lower shelf prices after the size change, which resulted in a range of different price changes in the CPI once the reduced size was taken into account.
In the CPI, the average price of a family-sized block of chocolate bought in supermarkets rose by 19.0 percent to $4.44 in June 2009, from $3.73 in May, following (and after adjusting for) the change in size. More recently, prices have fallen. In February 2010 the average price of a family-sized block was $3.82, 2.4 percent higher than in May 2009.
These three examples illustrate only some of the permanent size changes that have recently occurred to the basket of goods in the CPI. When size changes are observed by price collectors, adjustments have – and will continue to be – made to ensure that size reductions that are not offset by equivalent shelf-price reductions are shown as price increases in the CPI.
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