What is the Consumers Price Index and why do we care?

Wednesday, 17 July 2024

The Consumers Price Index is all about tracking the price of goods and services overtime.

The latest Consumers Price Index data is being released on Thursday.

Although it sounds a bit boring, it’s a crucial set of data. Here’s why we should care.

What is the Consumers Price Index?

The Consumers Price Index (CPI) is the most globally used measure of inflation and the data is released quarterly by Stats NZ.

It tracks the prices of goods and services purchased by New Zealand households, such as housing, household utilities, recreation costs and transport costs, over time.

Okay, but why should we care?

There are so many things to care about in this day and age so we get it’s hard to care about everything.

But the CPI is definitely something to care about, Westpac chief economist Kelly Eckhold said.

“It’s a key determinant of your standard of living because the things you can buy with your earnings are critically determined by how much they cost and the CPI is the price changes of a basket of things that everybody buys,” he said.

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

Kiwibank senior economist Mary Jo Vergara agreed the CPI was important because “inflation, the rise in prices, influences people’s purchasing power”.

What happened with the CPI last quarter?

In the quarter ending March 2024 the CPI had an annual increase of 4%.

Housing and household utilities increased 4.5%, due to higher rent, construction, property rates and related services all increasing in price.

Recreation and culture increased 5.6%, due to accommodation services recreational and cultural services, other recreational equipment and supplies also all increasing in price.

Alcoholic beverages and tobacco increased also increased, up 7.4% on the year previously.

So what can we expect?

ASB senior economist Mark Smith released a report stating the bank’s economists expected a 0.4% quarterly increase in headline CPI over Q2, with headline inflation falling to 3.3%, its lowest since early 2021.

Eckhold said Westpac economists were predicting inflation to be around the 3.5% mark.

But what they were closely watching was what services prices were doing.

“That’s like the cost of your haircut, if you take your car to get fixed, if you have to hire an accountant or a lawyer.

“Because a lot of those costs are slower moving, trends last for longer and they’re quite related to the degree of wage growth.

“So we’re really looking for signs that some of those services prices are not going up as fast as they had in the last few years.”

Vergara expected consumer prices to have grown 0.5% over the June quarter.

“Prices for food, holiday travel and fuel looked soft over the quarter. But there’s persistent strength in items including rents, council rates and insurance cost,” she said.

She also believed inflation would be decelerating to 3.4% over the year, from 4% which would be the lowest in three years.

“Tomorrow’s update however is not just about the headline number. In our view the underlying trend is more important.

“Core measures of inflation strip out the volatile price movements in food and energy. And a weakening economic backdrop, slower wage growth, and softer business pricing intentions suggest that underlying consumer price growth is easing.”