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Printable version
Key Statistics - article, January/February 2001, p. 7-10
Developments in price indexes
Introduction
Statistics New Zealand’s strategy for the development of price indexes is driven by a number of issues. This article will briefly discuss the need for a comprehensive price index framework and give an indication of how this might be achieved. It will then outline challenges common to a range of price indexes and look at types of improvements being individually considered for each of the main indexes.
The need for an overall framework
The diagram below, describing inflation flows in the economy, serves as a broad outline of how our price indexes combine to provide a picture of price pressures in the economy.
A more detailed framework for price indexes would make it easier to trace price changes, from raw materials and imported goods used in the production process, through the distribution chain and into the prices faced by consumers. More particularly it would be desirable to be able to determine how price changes faced by producers and importers are absorbed, exported or passed on by companies further along the distribution chain.
It is difficult to do this with our current range of measures. It is not easy to look at the Import Price Indexes, the Labour Cost Index and the Producer Price Indexes and assess what the implications might be for the Consumers Price Index. Ideally, it should be clear whether materials that are changing in price are being used to produce items which are exported or sold to New Zealand consumers, and how early they are being used in the chain of production.
A number of other countries have addressed this difficulty. In particular the Australian Bureau of Statistics has developed what they call a ‘stage of production’ approach. This approach uses producer prices and import prices, and identifies where they contribute to a chain of production. The headline figures exclude the prices of exported items. This is done because price changes in exported items do not place as much pressure on domestic inflation as their weight in the traditional PPI presentation might suggest. Analysis of this information has shown a clear pattern of higher input price rises at earlier stages of production, without compensating price increases later in the chain. This provides some evidence that margins are being squeezed at the retail end of the production and distribution chain.
Statistics New Zealand will be assessing alternative frameworks for presenting price change before implementing new strategies.
General measurement challenges across indexes
As well as the challenges in organising and presenting price indexes in a comprehensive way there are other issues faced by indexes.
In general terms the speed at which the range of goods and services available is expanding makes it difficult to keep price indexes up-todate. To understand why this poses problems for price indexes, it is necessary to realise that constructing price indexes consists of breaking down expenditure change into volume and price change, and breaking down price change into pure price change and quality changes. Below are some general trends that make this challenging.
Shortened product life cycles
Many goods are being replaced by new models more rapidly than in the past. The problem that this poses for price indexes is that both decisions about the timing of the replacement of items being priced, and the frequency of pricing, become more complex. Goods typically have different prices at different stages of their product life cycles, and so it becomes considerably harder to price goods at their ‘normal’ level after they have got past being a novelty and before they are subject to run-out sales. A good example of this sort of problem is provided by running shoes in the CPI, where some models can go through a whole life cycle in the space of one quarter.
In general this type of situation is best dealt with by introducing new models before old models have gone out of stock. Applying this approach gives statisticians an idea of what life cycle stage different models have reached and helps manage their movement into and out of the index.
Technological advances in goods
Price indexes are built around keeping the ‘basket’ of goods and services at a constant quality. This constancy is difficult to achieve when technological improvements are continuously being added to new models. For example, if the new model of a car has a feature that the old model didn’t, then in calculating a price index it is necessary to give a value to the price of the new feature. The price of the new model must be reduced by the value of the new feature.
Clearly this opens up debate about what types of improvements should be adjusted for in this way and how the process of valuation should be carried out. There are a variety of ways of doing this. Some resource intensive techniques are becoming internationally regarded by other statistical offices around the world as the best way to meet these challenges. These techniques tend to be complex as well, and need to be carefully assessed by Statistics New Zealand before being used.
Increased tailoring of pricing options for technology-intensive services
One of the impacts of technology has been that providers of technology-intensive services can offer customers a wide range of options about how their price schedule is structured, and in intensively competitive environments these can change rapidly. This environment creates a number of problems in constructing price indexes.
For example, the price of a service such as a telephone becomes dependent on many factors, including the consumption of other services and the total value of services used. In some instances the price paid for telephone services can depend on the company from which a consumer has purchased their Internet services or their electricity.
Even with this complication, consumers buying the same service from the same supplier can end up paying different prices. For example, the price paid for using a cellphone will depend on which plan the consumer is on. The same number of calls at the same time of day can end up costing individual consumers significantly different amounts of money in this situation.
The rapidly changing price schedules mean that consumption patterns have to be defined in sufficient detail, so they can be priced even if the basis of charging changes completely (for example, if the call zones on domestic toll calls are restructured). Consequently, the price indicator surveys that are in place now have to be considerably more extensive so that important sources of price change are not missed.
Against this background it is informative to look at the types of developments that have been recently undertaken and are currently planned for the main price indexes listed below.
The Consumers Price Index (CPI)
Up until now, the weights for the CPI and the items that are priced have been updated every five years or so. This process is referred to as a rebase, and it helps ensure that the CPI reflects what is currently happening in the economy. The CPI was last rebased for the publication of the September 1999 quarter. Additionally, there was also a change in the goods and services included in the CPI. Interest costs and housing section prices were excluded, as an index excluding these items was deemed to be more consistent with the aim of measuring inflation, which is now recognised as the principal purpose of the New Zealand CPI. Information about the scope of this work can be obtained from the Statistics New Zealand website.
The next rebase will be implemented in the June 2002 quarter. As well as updating the expenditure basket, there will be a particular focus on improving our price indicator collections for technology-intensive services. Statistics New Zealand will also minimise sources of bias in the CPI by developing new approaches for collecting prices. These approaches will reflect changes in the retailing sector and in the broader economy. International developments in price index theory will be monitored for discussion at the next rebase.
The Producers Price Index (PPI)
The major benefit of the PPI development was an updated weighting pattern which was first published in the June 1998 quarter’s release. Other gains included revising the ANZSIC structure of the PPI to bring it into line with the groupings used by National Accounts, and the introduction of a hierarchical building block structure. The building block structure created a large number of commodity indexes, which can be used widely in the industry group indexes. An example might be the creation of a legal services index, which can be applied in any industry where legal services are a significant input cost. The benefits of this structure include increased industry detail, analytical capability and a simplified process to undertake progressive reweighting. The details of this development and the underlying principle employed in the measurement process are outlined in the PPI Concepts, Sources and Methods available on the SNZ website. The focus of future development will now turn to upgrading pricing indicators and extending the use of the building block structure.
It is hoped that a system of annual chain-linking will be introduced within the next two years. This would make the PPIs consistent with the chainvolume measures recently adopted in the New Zealand National Accounts.
The Capital Goods Price Index (CGPI)
The CGPI December 1999 quarter release introduced a new index structure. The main change was an update of the weighting pattern. A new series of indexes for plant, machinery and equipment was also introduced, bringing these groupings into line with those used by National Accounts. Future development in the CGPI is expected to include improving the quality of the pricing used in the building category.
The Overseas Trade Index (OTI)
The OTIs are about to undergo significant changes. Some of the main methodological changes that will occur are: a change to the index formula, extending the source of prices used in the indexes, the exclusion of large one-off items (such as frigates) from the indexes, and a new imputation method. These changes will make the index results more transparent, reduce the amount of imputation occurring and reduce the volatility in the volume indexes.
The structure of the OTIs published will also be expanded to produce indexes based on the Harmonised System classification, utilising a building block approach. The benefits that will result from this structure will be a suite of transparent indexes with increased analytical opportunities which will be more comparable with overseas statistical agencies’ trade indexes.
A consultation document outlining the detail of these changes can be obtained from loretta.dobbs@stats.govt.nz.
The Labour Cost Index (LCI)
The LCI has needed some modifications to accommodate the changes in workplace insurance and the changes to the fringe benefit tax regime. These changes introduced competition in the provision of workplace insurance, and the first round of reforms complicated measurement because it gave firms the option of risk sharing (accepting some liability of the direct costs of accidents). These changed costs could not be compared with the firms’ previous ACC levies, so further investigations had to be undertaken. The next round of reforms changed the situation again and these will be reflected in the All Costs Index released in 2001.
Complications arise from the fringe benefit tax arrangements because they allow for balancing at the end of the year. It will be necessary to develop measures which ensure that the diversity of choices available to companies is reflected in the index.
The next development that needs to take place in the index is updating the weights to incorporate the 1996 Census data. This is currently scheduled to take place for the June quarter, which will be published in August 2001. The intention is that the information from the 2001 Census will be incorporated into the LCI before the end of 2002.
How to find out about the status of ongoing developments
If you are interested in being informed of the progress of any of these developments you can let us know by contacting the staff member on the relevant Hot Off The Press or by contacting Vince Galvin, Chief Economist, Inflation Measures Division, vince.galvin@stats.govt.nz.
Releases of unit-record data and Business Frame lists
Confidentiality protection
The Statistics Act 1975 requires that information provided by people, households and businesses is collected in confidence and that it is securely protected. Use of the information is limited to statistical purposes. The Government Statistician makes office rules to prevent the release of information which would identify individual respondents in aggregated statistics published by the department.
There are, however, some explicit situations where information on individual respondents might be released. These are tightly prescribed by the Act and include the release of information for bona fide research or statistical purposes to another government department. Proposals to access unit record data are assessed against the Microdata Access Protocol before a decision is made by the Government Statistician.
Furthermore, the Government Statistician has the discretion to release certain types of information including the names and addresses of businesses. However, the Business Frame release policy is to only release names and addresses of businesses for the purpose of conducting major statistical surveys of national importance.
The granting of access to unit-record data and the release of lists of names and addresses from the department’s Business Frame are documented and updated quarterly in the January/February, April, July and October editions of Key Statistics. It is also documented on Statistics New Zealand’s website.
Unit-record data
On-site access
Access to anonymised, unit record data, on Statistics New Zealand premises and using Statistics New Zealand data processing facilities in the period September to December 2000, was granted to researchers for bona fide research or statistical purposes, as summarised below:
- Access to selected variables from the 1984, 1992, 1996 and 1998 Household Economic Surveys was provided to researchers from the Department of Applied and International Economics, Massey University in September. The data is being used to investigate dimensions of poverty in New Zealand.
- Access to selected variables from the 1996 Census of Population and Dwellings and the 1998 Household Economic Survey was provided to researchers at the Christchurch School of Medicine, University of Otago in December. The project aims to extend and refine the New Zealand socio-economic Index (NZSEI) and then apply it to the analysis of the socio-economic patterning of well-being.
Researchers have agreed to abide by the following rules to give effect to the confidentiality provisions of the Statistics Act 1975:
- no attempt is to be made to identify any individual, family, household or business from the data, or to match individual, family, household or business data with any other data at a unit-record level without the written permission of Statistics New Zealand;
- access to the data is to be restricted to those persons who have signed the statutory declaration of secrecy specified in section 21 of the Statistics Act 1975;
- no statistical table or other information is to be released which would enable the identification of any individual, family, household or business from the data;
- the published results of any research must not divulge any more information than Statistics New Zealand could publish under the Statistics Act 1975;
- no part of the unit-record data is to be removed from Statistics New Zealand’s premises; and
- all material leaving Statistics New Zealand’s premises will be scrutinised by Statistics New Zealand to ensure that confidentiality is maintained.
Off-site access
Access to anonymised unit record data was granted to government agencies for bona fide research or statistical purposes under section 37C of the Statistics Act 1975 in the period September to December 2000, as summarised below:
- Access to the 2000 Business Practice Survey to the Ministry of Economic Development in September. The data will be used to investigate the relationship between the adoption of best practices and performance.
- Access to the 1999 Time Use Survey to the Department of Labour in October. This results of the research will be used to inform policy discussions on the prevalence and nature of non-standard work.
- Access to the June 2000 Income Supplement to the Household Labour Force Survey to the Department of Labour in October. This will be used for policy-related research in the areas of earnings and incomes, labour supply, minimum wage, productivity levels and employment.
- Access to the June 2000 Income Supplement to the Household Labour Force Survey to the Treasury in October. This will be used to calibrate the Household Economic Survey data used in TaxMod.
- Access to the June 2000 Income Supplement to the Household Labour Force Survey to the Ministry of Social Policy in October. The data will be used for monitoring changes in the distribution of employment and income.
Anonymised unit record data from the Household Savings Survey is being provided to the Government Actuary, under section 21(3B) of the Statistics Act, to draw on his expertise to estimate values for employer sponsored defined benefit superannuation schemes based on information collected in the survey.
All the organisations have agreed to implement specific security measures and to abide by the first four rules specified above to protect the confidentiality of the data.
Access to unit record data from the 2000 Research and Development Survey was approved in October for the Ministry of Research, Science and Technology. The survey is carried out every two years as a joint survey with the Ministry under section 9 of the Statistics Act. The survey measures the level, and changes to the level of research and development activity, employment and expenditure, by private sector enterprises, government departments and state-owned enterprises. The Ministry must abide by the security provisions of the Statistics Act, namely that:
access to the data is restricted to those persons who have signed a statutory declaration of secrecy similar to that specified in section 21 of the Statistics Act 1975;
no statistical table or other information is to be released which would enable the identification of any individual, family, household or business from the data.
Business Frame lists
There were no releases of Business Frame lists in the period September - December 2000.
Footnote
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Analytical Methods
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