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Food prices in the consumers price index and food price index

Food in the Consumers Price Index (CPI) had an expenditure weight of 17.38 percent as at the June 2006 quarter. The food group is also published monthly as the Food Price Index (FPI). The concepts, sources and methods used to compile food prices are explained in this article.

Position in CPI structure

The food group represents 17.38 percent of the CPI, making it the second largest group in terms of the expenditure weight, behind housing and household utilities (20.02 percent). The food group comprises 5 subgroups and 14 classes. Table 1 shows the composition of the food group within the New Zealand Household Expenditure Classification used in the CPI.

Table 1
Consumers Price Index Expenditure Weights for Food

Group, subgroup or class Level June 2006 quarter expenditure weight
%
Food Group

17.38

Fruit and vegetables Subgroup 2.20
Fruit Class 0.87
Vegetables Class 1.33
Meat, poultry and fish Subgroup 2.82
Meat and poultry Class 2.48
Fish and other seafood Class 0.34
Grocery food Subgroup 6.70
Bread and cereals Class 2.01
Milk, cheese and eggs Class 1.57
Oils and fats Class 0.31
Food additives and condiments Class 0.46
Confectionery, nuts and snacks Class 1.65
Other grocery food Class 0.70
Non-alcoholic beverages Subgroup 1.62
Coffee, tea and other hot drinks Class 0.32
Soft drinks, waters and juices Class 1.30
Restaurant meals and ready-to-eat food Subgroup 4.03
Restaurant meals Class 1.79
Ready-to-eat food Class 2.24

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Expenditure weight estimation

The Household Economic Survey (HES) is the primary source of information used to determine the expenditure weights for the items within the food group. While the HES is the primary source when determining expenditure weights, it does not always provide accurate estimates of expenditure. For example, respondents can tend to under-report expenditure on some goods and services. In such cases, independent estimates are made using various other sources. For food items where the HES is not considered to provide accurate information, such as confectionery and soft drinks, alternative information, such as supermarket scanner data obtained from ACNielsen, was used.

Expenditure weights are updated every three years, with the current price reference period being June 2006 quarter, based on the 2003/04 HES.

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Item and sample selection

An accurate measure of the overall price change can be calculated by periodically surveying the prices of a representative sample of goods and services. The sample of items must represent the range of commodities purchased by private New Zealand households and the movement of these must also be typical of the range of commodities the item represents. Practicality is also taken into account, hence it is best to frequently survey prices for selected commodities of the same quantity and quality each period. This will ensure that price changes registered in the index in a timely manner.

The food basket consists of 154 food goods and services. The items in the food basket were selected based on analysis from various sources, and most importantly, the HES. The item selection and pricing specifications (that is, details about a product to collect and monitor over time), are reviewed on a regular basis to ensure that items are representative of consumer behaviour. Examples of the type of goods and services priced for the food basket can be found in the article 'The food price index basket'.

As it is not practical to survey prices from every available outlet within New Zealand, samples of outlets within the 15 main urban areas are selected and outlet weights are used to combine the prices collected from each surveyed outlet. Notably, one supermarket from each chain in each region is selected to represent that particular chain (due to its geographical size, Auckland is an exception, where two supermarkets from each chain were selected). The 15 urban areas are: Whangarei, Auckland, Hamilton, Tauranga, Rotorua, Napier-Hastings, New Plymouth, Wanganui, Palmerston North, Wellington, Nelson, Christchurch, Timaru, Dunedin and Invercargill.

HES data on expenditure by storetype is used to weight prices collected at convenience stores (ie service stations, dairies, grocery stores and superettes), butchers, fish shops, greengrocers and supermarkets. For example, if supermarkets sell four times as much meat as butchers, the price movement of meat in supermarkets will have four times the impact on the overall price movement for meat as the price movement for butchers. Further, Retail Trade Survey data is used to weight supermarket store chains relative to each other within each region.

For each grouping of similar goods and services in the basket (when the outlet sample was reselected in 2006), price collectors in each of the 15 regional centres were given target numbers of outlets to select, broken down by storetype (such as ‘supermarket’ and ‘convenience store’). Storetype information from the HES was used to determine the main storetypes for each group of similar goods and services in the basket. In some cases, price collectors were also given more guidance about specific chains to include in the sample. Price collectors then used their judgement to select representative retail outlets in the pricing centres, to meet the target numbers of outlets.

To further assist in selection of the item sample, summary information collated from supermarket transaction data obtained from ACNielsen was used to:

  • determine representative pricing specifications for goods in the basket
  • provide price collectors with information about the market shares of the main brands
  • provide price collectors with specific brand-share targets for selected goods to ensure that the mix of brands in the FPI price samples reflected market shares.

Food prices are collected from about 650 outlets in the 15 surveyed urban areas. Of these, about 75 are supermarkets, 30 greengrocers, 30 fish shops, 30 butchers, 50 convenience stores (with half being service stations and the other half being dairies, grocery stores and superettes), 120 restaurants (for evening meals) and more than 300 are other suitable outlets (for breakfast, lunch and takeaway food).

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Price collection and quality control

Field collections staff from Statistics New Zealand personally gather prices from outlets within the 15 main urban areas during a week-long period that ends around the mid-point of each month. However, as prices tend to change more frequently than monthly, fresh fruit and vegetables are priced on a weekly basis at the end of each week; in most regions prices are collected on a Friday, while a few regions prices are collected on a Thursday.

The aim of the FPI is to measure the price change of the same product (brand and relevant details) at each outlet over time. In practice, this is not always possible. Restaurants regularly change menu items, as do food producers who regularly change the sizes and varieties of their products. In these cases a change in quality may occur when a substitute product is introduced into the FPI. Any change in quality should be adjusted so that the 'pure' price change, excluding all other factors, is measured. Generally speaking, any price change resulting from a change in quality is excluded from the FPI. Where an item changes in quality with no resulting price change (or increases in quality and falls in price and vice versa) a dollar value for the change in quality would be estimated and removed.

Quality assessments are made to put a monetary value on the change in value as perceived by the consumer between the old and new item. Prices are then adjusted so that no price change is shown that is related to the change in quality. For example, tea bags usually sold in boxes of 100 bags may come with 10 percent extra due to a promotion run by the manufacturers. In this case, consumers receive the full benefit of the extra 10 bags, hence the price would be adjusted so that it reflects the extra number of tea bags. Similarly, quantity specials (for example, three loaves of bread for $5.00) are also taken into account (as the price per loaf for the special is usually lower than the price of a single loaf). For example, if a loaf of white bread was $2.00 in March 2008, and three loaves of white bread were $4.80 in April 2008 (the single price remained $2.00), then the price per loaf has decreased from $2.00 to $1.60, hence a 20 percent fall in price would be shown. However, these promotions are usually temporary, and the price might revert back to $2.00 in May 2008. Such quantity specials are taken only where they are considered to be representative of the quantities likely to be purchased by households.

For some items within the food basket, the same item that is priced over time is regarded as the cheapest available item. Cheapest available prices are collected for selected items that are deemed to have little quality difference across different brands, and for which consumers are unlikely to exhibit much brand loyalty (and hence buy whichever brand is cheapest). While this may not result in an intuitive average price of transactions, it should adequately represent price movements over time and allows for the published price changes to be representative of consumers' buying patterns. Examples of where this method is used are frozen peas, white bread, white flour, standard homogenised milk, cheddar cheese, eggs, butter and sugar. All fresh fruit and vegetables are priced on the basis of cheapest available, although usually with respect to variety, as long as the variety chosen is of suitable quality for most uses (that is, not damaged or spoiled).

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Ongoing sample maintenance

At times, the products priced are not available as they may be temporarily out of stock or permanently removed from sale. If a product is temporarily out of stock the price is carried forward from the previous period. Generally speaking, if the product is still unavailable at the next pricing period, the product, or if needed the outlet, will be replaced. If a class of item is removed from sale from an outlet, then it will be priced, where possible, in a similar outlet.

The replacement of an outlet can occur for a number of reasons, commonly when an outlet closes, when stocks are run down, or the item priced is no longer available on a regular basis. If an outlet needs to be replaced, then another outlet of the same or similar type and in the same area is chosen. If a chainstore outlet closes in a particular region, then it is either replaced by another store of the same chain or, if no other store exists, the chain is dropped from the survey in that region. If an independent outlet closes, it is replaced by another independent outlet of a similar nature.

When a new chain opens in a region, it is included in the outlet sample so that each chain of that particular type in the region is represented. A new outlet often introduces price instability as consumers respond to promotional activities and trial the new outlet. Hence new outlets are introduced to the FPI when reliable pricing and weighting information is available.

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Estimation

Estimation of food prices is undertaken in three stages. Firstly, regional elementary aggregates are calculated from all prices for an item within a region. Secondly, the New Zealand item-level index is calculated by combining the regional elementary aggregates. Lastly, item-level indexes are combined to the overall FPI or food group of the CPI.

Regional elementary aggregates are calculated using a 'geometric mean of price relatives', or Jevons formula. The Jevons formula is used to calculate average prices for all food goods and services in the basket, except for fresh fruit and fresh vegetables. The Jevons formula assumes that households spend the same amount at each surveyed outlet in each period. This implies that increased quantities are purchased from outlets showing lower-than-average relative price change and decreased quantities from outlets showing higher-than-average price change.

The Jevons formula is:

Graph, Jevons Formula.

In practice, a weighted geometric mean formula is used with the weights where available, representing the relative importance of outlet types such as supermarkets relative to convenience stores and the relative importance of individual outlets (eg supermarket chains). HES data on expenditure by storetype is used to estimate the outlet type weights. Further, Retail Trade Survey data is used to weight supermarket store chains relative to each other within each region.

As four or five prices (depending on how many Fridays fall within a given month) are collected within each month for fresh fruit and vegetables, the 'arithmetic mean of price relatives' or Dutot, formula is used as the first stage of aggregation is across both outlets within each region and across weeks within each month.

Regional elementary aggregate indexes, for each of the 15 regions where prices are surveyed, are then combined to calculate the New Zealand item-level indexes using regional population-weighted shares of the national expenditure weight. Each region is assumed to have the same spending pattern (ie the same goods and services are price-surveyed in each region and they are given the same relative importance within each region). The population of each regional council area (or a proportion of it) is assigned to the most appropriate of the 15 urban areas priced in the FPI.

Lastly, the national expenditure weights of different items are used to combine the New Zealand item-level indexes to calculate the overall FPI or food group.

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Seasonal adjustment

Until June 2006, fresh fruit and vegetable items that exhibited a seasonal pattern were adjusted to remove the effect of normal seasonal change. This treatment was used to reduce the influence of normal seasonal price fluctuations. However, the treatment did not completely eliminate the effects of seasonal fluctuations if shifts in seasonal patterns occurred. Food was the only group in the CPI for which seasonal adjustment was applied. In a New Zealand context, fresh fruit and vegetables are very prone to exhibiting price behaviour different from their expected seasonal pattern. This is most commonly due to unseasonal weather that damages crops or delays their harvest. New Zealand's small size means that one local event can have a large effect on national average prices.

From July 2006 onwards, the FPI incorporates seasonally unadjusted prices for fresh fruit and vegetables. This is in line with a recommendation made by the 2004 CPI Revision Advisory Committee. The ongoing, fully unadjusted FPI was linked at June 2006 to the previously published FPI, which was partly seasonally adjusted. As such, annual movements calculated over the annual period encompassing the June 2006 month were based on fully unadjusted index numbers for the latest month compared with partly adjusted index numbers for the same month of the previous year.

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Reconciling the Food Price Index and food group of the CPI

When comparing the FPI and the food group of the CPI, strictly speaking, the quarterly food group index number is not the average of the relevant three monthly FPI numbers. There are some technical differences between the monthly FPI indexes and quarterly indexes:

  • For the quarterly price reference period expenditure weights, annual quantities were combined with price reference quarter prices. However, the prices that were collected for the new index's sample of outlets and items (ie April, May and June 2006) for the new basket differed from the prices collected for the ongoing (and published) FPI for April, May and June 2006. As such, the quarterly price reference period prices are not the same as those used for the published FPIs during the price reference quarter.
  • Published weights prior to the June 2006 quarter and June 2006 month were based on seasonally adjusted fresh fruit and vegetable prices (as the prices used in calculating the indexes were also adjusted in an attempt to remove the impact of regular seasonal variation in prices).
  • As the FPI has a monthly price reference period, the prices for the June 2006 month can differ from the average of April, May and June months that comprise the June 2006 quarter.

All of the above can result in different weights, even though the same annual quantities were used in both cases.

Table 2 below gives the weights of the subgroups and classes within the food group on a quarterly and monthly basis. The weights within the quarterly food group have been rescaled as a percentage of the food group, rather than the CPI. For a number of fresh vegetable items, June 2006 month average prices were higher than the June 2006 quarter average prices, leading to a higher expenditure weight for vegetables in the FPI than in the food group of the CPI.

Table 2
Food and Consumers Price Index Expenditure Weights – A Comparison

Subgroup and class Food Price Index June 2006 month
%
Consumers Price Index - Food group June 2006 quarter
%
Fruit and vegetables subgroup 13.55 12.68
Fruit 4.90 5.02
Vegetables 8.66 7.66
Meat, poultry and fish subgroup 16.22 16.23
Meat and poultry 14.28 14.27
Fish and other seafood 1.94 1.97
Grocery food subgroup 38.19 38.56
Bread and cereals 11.49 11.54
Milk, cheese and eggs 8.89 9.05
Oils and fats 1.75 1.76
Food additives and condiments 2.63 2.66
Confectionery, nuts and snacks 9.39 9.50
Other grocery food 4.04 4.05
Non-alcoholic beverages subgroup 9.04 9.33
Coffee, tea and other hot drinks 1.79 1.84
Soft drinks, waters and juices 7.24 7.50
Restaurant meals and ready-to-eat food subgroup 23.00 23.19
Restaurant meals 10.23 10.31
Ready-to-eat food 12.77 12.89
Food group 100.00 100.00

 

Back to Price Index News: July 2008

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