The Consumers Price Index

1. The Consumers Price Index

2. Price Index Numbers • These allow us to reduce complicated statistical changes down to one single number. • Example: CPI • Takes prices for a large ‘bundle’ of goods and calculates an index number that gives good indication of prices and whether inflation or deflation is occurring.

3. Constructing a Price Index • Assume that the economy only produces and consumes one good (food). Assume that this food is traded at the following prices each day What can we say about the general price level? It has doubled!!

4. Constructing a price index • What if there were two types of goods? • (food and capital goods) What can we say now about the general price level? Not so easy now to comment about the general price level…… this is why we use a price index.

5. Constructing a Price index 100 200 An index requires a base period, so that we can make comparisons from this period to the next We will make Monday our base period The base year is always given an index value of a one with some zeros after it We will choose 100 for this index Now what would the index number have to be on Tuesday to tell us at a glance that prices have doubled?

6. Creating a price index

7. Calculating an index number… • This MUST be done from the base year: • Step one- calculate the percentage change in price from the base year (difference/original × 100) • Step two- use this percentage value to adjust the index value from the base (usually 1000) • How do we do this? • If we have a base value of 1000, this is the same as 100.0. If we get a % change from the base year of 5.6 %, we add this to 100.0 and take away the decimal point. E.g. 100.0 + 5.6 = 105.6 = 1056

8. Using the Index values to work out the Inflation Rate • Inflation is calculated from one period to the next (NOT FROM THE BASE YEAR!). • This means we need to use our percentage change formula • % change = • e.g.

9. Simple Weighted Price Index Price per unit

10. The CPI • Most common weighted price index used to calculate inflation. • The CPI is calculated four times per year (quarterly) and results from household surveys conducted by Statistics NZ on a regular basis. • Prices for a basket of over 700 goods and services are surveyed regularly and in a number of area’s in NZ. • These goods are decided upon as to what the ‘average’ NZ household purchases • E.g. in 1990 a discman may have been included, BUT in 2009 an ipod would more likely be included instead.

11. Limitations of the CPI • It fails to include prices for goods that are difficult to measure, e.g. second hand goods • Measures changes in retail prices as they affect the average household… BUT what is the average household? • Spending patterns are constantly changing (because our income, tastes and fashions are constantly changing, new goods coming into the market) which creates a problem with weighting various categories of goods and services

12. Limitations of the CPI • Many goods change in design, quality and performance (with ever changing technology), e.g. the computer market- computers and laptops are constantly being improved. • It’s an acceptable internationally comparable statistic BUT other countries weightings, basket of goods, and review periods may differ.

13. Other price indexes • Producer price index: measures inflation via the costs of production. The PPI inputs are such things as electricity, fuels, materials, etc • Food price index • Capital goods price index (CGPI): measures inflation in terms of capital goods (investment goods= used to make other goods and services) e.g. office and accounting machinery, ovens, vehicles, etc.