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Consumers price index resource

This page is a learning resource for the consumers price index (CPI). It outlines the purpose of the index and its main uses, and provides a few practical exercises relating to the index.

What is the consumers price index?

The consumers price index (CPI), New Zealand's best known measure of inflation, measures the rate of price change of goods and services purchased by households.

The CPI consists of a basket of goods and services that represent purchases made by households. The goods and services in the basket, and their relative importance, are reviewed every three years to ensure the basket remains up to date.

There are about 690 goods and services included in the basket. They are classified into 11 groups:

  • food
  • alcoholic beverages and tobacco
  • clothing and footwear
  • housing and household utilities
  • household contents and services
  • health
  • transport
  • communication
  • recreation and culture
  • education
  • miscellaneous goods and services.

These groups are then broken down further into 45 subgroups and then into 107 classes. The CPI is reported each quarter down to the class level.

Each good or service in the basket is assigned an expenditure weight (see definitions under ‘Statistical calculations’) that represents its relative importance in household spending patterns. Goods and services that are more important to households are given higher weights and have a greater influence on the CPI. The weight assigned determines how much impact a price movement for a particular good has on the overall CPI. For example, if households spend more on petrol than on milk, a 5 percent increase in the price of petrol would have a greater impact on the CPI than a 5 percent increase in the price of milk.

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How is the data collected?

Prices used in the CPI are collected through three main methods: visiting retail outlets, postal surveys, and the Internet.

Statistics NZ employs price collectors who personally visit over 3,000 different shops in 15 main centres throughout the country. Some examples of the types of outlets visited include supermarkets, department stores, and appliance stores. Prices are collected weekly for motor fuels and for fresh fruit and vegetables; monthly for food, non-food groceries, alcoholic beverages and newspapers; and quarterly for other goods and services.

In addition to prices obtained by field collectors, there are about 70 different postal surveys sent out each month, quarter, or year. These surveys are used primarily for collecting the prices of services such as electricity and bus fares. The surveys are sent directly to service providers.

Some prices are collected each month or quarter from the Internet.

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How is the CPI used?

The CPI can be used to report how prices that households face have changed over time, that is, the percentage change between different periods for each class, subgroup, group, or for the overall CPI.

The CPI is used to help set monetary policy. The Policy Targets Agreement between the Governor of the Reserve Bank and the Minister of Finance, aims to keep annual CPI movements between 1 and 3 percent over the medium term. In doing this, the Governor increases or decreases the official cash rate and changes in this rate have an impact on mortgage interest rates that households pay.

Another important use of the CPI by the government is to adjust New Zealand Superannuation and unemployment benefit payments once a year, to help ensure that these payments maintain their purchasing power.

Employers and employees use the CPI in wage negotiations. The main reason cited by employers for increasing pay rates is to reflect changes in the cost of living.

In addition to the publication of index numbers and price movements, Statistics NZ also publishes a table of average prices of selected goods and services listed in table 5 of the quarterly CPI information release. These figures are weighted average prices that can be compared with previously published average prices. They are not statistically accurate measures of average transaction price levels, but provide a reliable indicator of percentage changes in prices. Comparing the CPI average prices with other prices, for instance prices collected directly from individual stores, may be misleading because the CPI average prices are nationwide weighted averages covering many brands, varieties, and types of outlets.

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What are the common confusions?

It is important to note that the CPI is not a measure of price levels or average prices, it is a measure of price change. A price index is a series of numbers that show how a whole set of prices has changed over time. One index number by itself means nothing. Another index number is needed for comparison in order to calculate the movement between the two periods.

A common confusion associated with the CPI is that it should exactly represent an individual's personal inflation experience. The goods and services used to calculate the CPI and their relative importance reflect purchases made by all New Zealand private households. The basket includes a large variety of goods and services, which is very unlikely to exactly match the purchases of any individual household. For example, the basket includes items associated with both home ownership and housing rentals. Furthermore, the CPI includes prices from throughout the country, whereas most households make the majority of their purchases in just one region. This means that movements of the CPI will not match exactly the inflation experiences of individual households.

Another common confusion is that the CPI is a general measure of inflation that is suitable for most uses. In fact, the CPI measures inflation faced only by households. Statistics NZ publishes other inflation measures affecting other purchasers or sellers of goods and services. The Producers Price Index (PPI) is a measure of the change in the general level of prices both charged by and faced by businesses. The Labour Cost Index (LCI) measures changes in wage and non-wage labour costs faced by employers. The Overseas Trade Indexes (OTIs) measure changes in the levels of both prices and volumes of imports and exports of merchandise trade to and from New Zealand.

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Statistical calculations

Definitions

Expenditure weight – The measure of the relative importance of an item in the index basket, based on the expenditure of the item relative to expenditure on all items in the basket.

Index number series – A series of numbers measuring movement over time from the index reference period value.

Index reference period – The period in which the average price level of goods and services is an index number of 1000. This number is chosen to represent the reference period, but the interest is only in the relationship of the other index numbers to it. The index reference period for the CPI is currently the June 2006 quarter.

Percentage change – The change in an index number time series from one period to another expressed as a percentage of its value in the first period. Percentage change can be calculated using the following formula:

percentage change = current value - previous value x 100
______________________           
previous value          

Example

Calculating a single-item price index time series

A price index can be calculated for a single item by:

1. Taking a time series of prices.

Table 1

Taking a time series of prices
Item Month
Jan Feb Mar Apr
Mushrooms ($ per kg) 5.00 5.60 6.00 7.00

 

2. Choosing an index reference period. In this case, we chose January but any month in the series could have been chosen.

Table 2

Taking a time series of prices
Item Month
Jan
(reference)
Feb Mar Apr
Mushrooms 1000 ... ... ...
Symbol: ... not applicable

3. Calculating the index numbers using the increase in the price from the index reference period to each of the other months:

single item price index = index reference x current price
                                   ___________
                                   reference price

Table 3

Calculating the index numbers from the price changes
Item Month
Jan Feb Mar Apr
Mushrooms 1000

1000 x 5.60 = 1120
____
5.00

1000 x 6.00 = 1200
____
5.00
1000 x 7.00 = 1400
____
5.00

 

Activity

Calculate an orange juice price index time series

Table 4 shows a time series of prices for orange juice.

Table 4

Taking a time series of prices
Item Month
Jun Jul Aug Sep
Orange juice ($ per litre) 3.00 2.40 3.00 3.60

 

In table 5, the reference period has been set to June (=1000).

Table 5

Taking a time series of prices
Item Month
Jun
(reference)
Jul Aug Sep
Orange juice 1000 ... ... ...
Symbol: ... not applicable

 

In table 6, calculate the index numbers for August and September, remembering to compare the price for each month with the reference price for the June month. July has been done for you.

Table 6

Calculating the index numbers from the price changes
Item Month
Jun Jul Aug Sep
Orange juice 1000 1000 x 2.40 = 800
____
3.00

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Further reading

All about the consumers price index: A layperson's guide
Consumers price index – 2008 review
Consumers Price Index: December 2008 quarter

Answers

Item Month
Jun Jul Aug Sep
Orange juice 1000 1000 x 2.40 = 800
____
3.00
1000 x 3.00 = 1000
____
3.00
1000 x 3.60 = 1200
____
3.00
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