# CPI in New Zealand – how is it worked out.

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. The table below shows the CPI in NZ for the September Quarter 2016 with the 11 groups and the final calculation (All groups) being 0.2% for the Quarterly and Annual change.

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.

What is a Price Index?

A price index is a single figure that shows how a whole set of prices has changed over time. A price index uses one number to represent the prices being charged for various goods and services at the wide range of outlets and locations where they are being purchased. The average price level of goods and services in the expression base period are assigned an index number of 1000. This is the benchmark to which average prices in other periods are compared. Thus, if the index number for a period is 1150, prices have increased by 15.0 percent since the base period. Workings below:

Increase in index number = 1150 – 1000 = 150

150/1000 x 100 = 15%

Reference population

The population coverage of the CPI relates to the expenditure of private, New Zealand-resident households living in permanent dwellings. The reference population covers approximately 98 percent of the usually-resident population. There are no exclusions based on income source or geographic location.

The target population for the Household Economic Survey (HES) mirrors the reference population for the CPI. The HES excludes residents of temporary dwellings and households in very remote parts of the North and South Islands and on offshore islands, including Great Barrier, Kawau, Stewart and the Chatham Islands. Some types of expenditure are also excluded because their price movements cannot be satisfactorily measured nor can they be related to the price movements of items which are price-surveyed. These include works of arts, illicit drugs, pets and other livestock, gambling, most legal services etc.

All prices are surveyed at least quarterly, though many prices are surveyed more frequently due to their price volatility (for example fruit and vegetables are surveyed weekly). The types of outlets surveyed reflect the places indicated as typical in the Household Economic Survey.

Some Definitions

Expenditure weightThe 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 seriesA series of numbers measuring movement over time from the index reference period value.

Index reference periodThe 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.