The Reserve Bank worries the Consumers' Price Index (CPI) may not accurately reflect the level of inflation in the economy, as the basket hasn’t been fully updated since 2020.
Statistics NZ usually reviews the index every three years but missed the 2023 update due to the Household Economic Survey being suspended during Covid restrictions in late 2021.
While an update has been planned for April this year, the current inflation statistics are based on spending patterns measured in late 2018 and early 2019. A lot has changed since then.
Households are likely spending more on basics, such as food, housing, insurance, and council rates, and less on things such as recreation and technology products. There may also be changes needed to account for the improving quality of items, these are called hedonic adjustments.
While annual headline inflation was last measured at 2.2%, in the third quarter of 2024, policymakers at the central bank are openly questioning the accuracy of that number.
In an interview on Thursday, Reserve Bank (RBNZ) Assistant Governor Karen Silk said other developed economies revised their CPI baskets every year, but Stats NZ hadn’t conducted a full review in nearly six years.
“Covid created a bit of a deferral, because of the census and all those things, but again, it's still being deferred, and we may get a reweighting some time in the next 12 months”.
“We are trying to measure inflation, and we're using CPI, and I'm looking at it, and it may not be truly reflective of inflation within the economy,” she said.
Silk said it was impossible to say how much a reweighting might move headline inflation, but there had been significant swings in how people spent money during the pandemic.
“Understanding these things and having good information around it's really, really important if your goal is to have low and stable consumer prices”.
Interest.co.nz reported a year ago that Stats NZ's briefing to incoming Minister of Statistics Andrew Bayly showed it was overdue on updating the goods and services included in its CPI. Bayly said the development work to update the CPI weights was unfunded, but was a priority and he was "engaging with officials on this work."
And in its March 2024 Monetary Policy Statement the RBNZ said Stats NZ's move to start reporting Selected Price Indexes, representing about 45% of the total CPI basket monthly, was welcome, but encouraged Stats NZ "to continue improving the frequency at which prices are reported in the New Zealand economy."
Mistakes already made
RBNZ Governor Adrian Orr told Parliament's Finance and Expenditure Committee that key economic data should be published monthly, like in other OECD countries.
“We keep talking about the frequency, but also the rebasing. Our consumer price index hasn't been re-based … You know, a laptop always costs $2,000, but what you get in that laptop has changed beyond belief,” he said.
“You need to rebase these things on a pretty regular frequency, and that has just been put on the back [burner]”.
Orr said he had “faced heavy questioning from the Prime Minister and Minister of Finance” about the central bank’s capabilities and had to remind them it wasn’t a statistics agency.
The Governor said this wasn’t a criticism of Stats NZ, which he said was a sharp institution but would need more funding and resources in order to deliver the RBNZ’s data wishlist.
However, he said the miscalculated Gross Domestic Product data had made it difficult for the bank to assess how interest rates were affecting the economy and set policy accordingly.
In May, the bank’s economic models and frameworks were struggling to explain why domestic inflation was still strong and widespread, even though economic activity appeared weaker.
“What we've since discovered is that it was because GDP was being mis-measured. It has had an over 2% revision in the level of economic activity in this country,” Orr said.
The Monetary Policy Committee considered hiking interest rates during the May meeting but it was unclear whether the revised GDP figures might have resulted in different policy settings.
In March last year, Stats NZ announced it would update the CPI basket in April 2025 to ensure the statistic “accurately reflects the inflation New Zealanders are experiencing”.
“This is especially important during a time of high inflation as higher prices can lead to households buying different items, or changing how much they spend on things like rent, food, and luxury items,” a spokesperson said in a statement.
It said international best practice was for CPI weights to be updated “at least” every five years and the update would fall within this time frame.
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67 Comments
Basically falling real per capita incomes mean people are spending more on necessities and less on luxuries. Necessity goods have been increasing at a higher rate than luxury goods causing real inflation to run higher for people than what is recorded in official stats.
Basically falling real per capita incomes mean people are spending more on necessities and less on luxuries.
Probably what you mean to say is that a greater share of wallet is allocated to non-discretionary spend in periods when price growth is greater than income growth.
Necessity goods have been increasing at a higher rate than luxury goods causing real inflation to run higher for people than what is recorded in official stats.
Correct. In fact, in periods when real incomes are being decimated (like now), there is typically more discounting for goods that are 'discretionary spend', such as luxury goods or 'nice to haves'.
RBNZ clutching at straws trying to find ways to explain their abysmal performance since 2020? Methinks so.
But lets be clear, StatsNZ's household living-costs price indexes (HLPIs) provide a much better view of how we see inflation as it includes as the financial costs our woeful RBNZ forces upon us. The CPI - which should only be used by the RBNZ - attempts to excludes these costs (but isn't great at doing it at all).
This is so embarrassing, absolute amateur hour. She just casually chats away about potential CPI errors like it's no big deal - which it might not have been had you not pushed the OCR much higher than it needed to go, simultaneously destroying the economy and forced our talent to flee abroad.
You are an Assistant Governor, this is on you.
1) CPI 'errors' are inevitable, we don't have perfect data about everything in the economy.
2) To the extent delaying a rebalancing is a problem, no its not on the Reserve Bank, the Reserve Bank doesn't measure the CPI, StatsNZ does.
3) For all you know, the CPI error might be in the direction that OCR in hindsight should have been even higher. We don't know if it's a big deal and in what direction until StatsNZ undertakes the exercise.
1) CPI errors may be inevitable, in which case why overtighten?
2) I realise Stats NZ calculate the CPI and not the RBNZ, partly because I already knew it and partly because it clearly says this several times in the article
3) That's ok then (not). There are multiple references to hedonic factors not being captured. Now let me think, what would rising prices due to increaed features mean for the headline CPI??? That would mean we wouldn't overtighten into a sharply contracting economic sir.
It seems like half the commenters under this story are convinced that in fact real inflation is higher than reported, so it's a bit strange how certain you are that they overtightened. I agree with you that in fact it's more likely that rebalancing would show inflation to be lower, though as Silk points out, it's "impossible to say how much a reweighting might move headline inflation".
It seems like you are of the opinion that Reserve Bank policy in general has been bad, and mapping it onto this fairly technical (and possibly inconsequential) issue of how we count CPI. Would you prefer Silk weren't 'casually chatting' and instead talking in a panic? Should she be adding "and btw don't forget we royally screwed up by overtightening in 2023" to every statement she makes on any issue?
probably because they are paying rates - over 10% rises in most of NZ -- insurances - 6-10% across the board things that cant really be avoided - you can forego the latest phone or TV - which are going down - but not all the things that are rising -- Utilities - Water / Gas and Electric all well above the CPI -
More than happy for a review -but it would be nice if that finally reflected peoples actual spend and was weighted towards the things that have to be bought and paid for and not the possible luxury goods / entertainment / eating out end of the spectrum
"Ah, what better way to reduce inflation than by changing how its measured."
Orr is pushing for more regular (yearly) revisions of how the CPI is measured, this will quite possibly show higher inflation, rather than lower inflation. In any case, it's a good thing to have more timely data, it's not a "US playbook to screw the scrum".
Because when unavoidables like rates, insurance you can review and reset or maybe move, power (you can have shorter showers) etc are running ahead of inflation, then they are taking a bigger and bigger cut of the cash available from the household. And the smaller amount of cash left over is only able to buy less nice to haves.
At some point this needs to be acknowledged in the 'average basket of goods' that the average household is buying.
other developed economies revised their CPI baskets every year, but Stats NZ hadn’t conducted a full review in nearly six year
There is unfortunately a pattern of being late in measuring and reporting data in NZ, which is important for making crucial economic decisions.
If the inflation measurement is significantly wrong, then this will have very major effects on interest rates, then the NZD and GDP.
Couldn't they project what the likely reweighting may be then have put a lower band and upper band around this to give an estimate on the potential differences the reweighting may cause on the inflation estimates?
Doesn't seem like it would take too long to do this given the data they have access to.
Saying inflation in NZ is 2.2% now is a joke. Essential basic items rates (predicted to be near 10% this year again), insurance, transport, groceries continue to rise far in excess of 2.2%. Nearly every item I buy at Pak and Save has increased since 1 January, only today baby wipes which used to be 1.79 for ages went over $2, then $2.39, $2.59. Last time I bought them a couple of weeks ago $2.79 and this morning $2.99. Vogels bread inceased over 10%, milk, cheese, yoghurt up over 15% in just a few weeks. If people can't simply get by today I doubt they will care how much a fancy computer may have altered.
That's because it's summer. Wait for winter prices and there is a good chance that they'll be higher than last winter due to energy costs.
The Labour govt was trying to wean everyone away from coal and gas (Huntly excluded). If they succeed in converting tomato growers from gas or coal fired to electrical heating then the winter costs will already be high. Those tomato growers that stayed on gas or coal if they don't have to buy ETS units will be making windfall profits.
I absolutely agree.
However, the vested interests undoubtedly want CPI to further understate living cost increases, so that the economy can be flooded with more cheap debt and push up asset prices and game more market activity.
Rest assured, the statisticians will ultimately bend to their will and come up with a further watered down CPI methodology.
People on the street know what the real rate of inflation is, and how much they are spending, and how much of that spending is now going on non-discretionary items like council rates, insurance, electricity - all things going up in price by double digits each year. The idea that the average household is experiencing 2% inflation is ridiculous - the only things going up by 2% are those things that nobody can afford to buy at all anymore because all their income is going towards non-discretionary items.
And the hedonic adjustments are equally stupid. Laptops are not delivering increased functionality, they are simply delivering technology that allows them to still work. They still perform the exact same function that they did 10 years ago. Windows 11 is required simply because Windows 7 is no longer supported. A 1 Gbps ethernet card is required because internet speeds are now higher than 100 Mbps. Treating a $2000 laptop as being $1500 because it has the necessary modern tech inside it and calling it deflation, is just bullshit.
"People on the street know what the real rate of inflation is" - I don't think they do! For example you didn't mention any of the things that have gone down. Remember paying $3.40 a litre for 91 petrol at one stage? Or the things that have gone up by less than 2% - for example my broadband was $60 a month 10 years ago and is now $65 a month. Its far too easy to notice the things that go up lots and not the others.
And the hedonic adjustments are equally stupid. Laptops are not delivering increased functionality, they are simply delivering technology that allows them to still work. They still perform the exact same function that they did 10 years ago.
Really depends on your workflow. My desktop now is magnitudes faster at rendering than the one I had 10 years ago, which genuinely allows me to complete work faster and produce things I wouldn't of even considered previously. Even basic things like Adobe software runs way faster. My old computer would basically be unusable in comparison, although to be fair for word docs and excel it would probably be fine.
And that 10x improvement in internet speed provides no utility? If not to you, then to the average person?
It's tempting to look back and understate the level of technological improvement, because people adapt to the current state of the art. Sure, the rate of progress might slow in some areas, but that's a far narrower criticism than writing off the idea of improved quality altogether.
Finally some recognition that the basket does not represent the purchasing power of typical Kiwi's.
Basket items need to better refect how the medium(not average) household actually spends their available income. The inflation data is currently skewed, with too many 'nice to have's' for those households with discretionary spending.
Orr has been instructed to keep on cutting whatever the CPI or HPLI will and say. In the meantime: home + contents insurance 2025 from $1890 to 2330; Electricity bill + $15.24 line charges from April 1st; Council rates +10.7% for 2025/2026 annual plan and many more others.
Because you need to know what they got for what they spent. Joe spends $400/month at petrol stations, then he starts spending $500/month, did the price of fuel go up 25%, or did he start having a relationship with someone in the next town over and driving more? Ditto with the supermarket shop, is the food more expensive, or did he get a dog.
Anyone with exposure to the real economy looked at Orr like he was mental when he was threatening to raise the OCR in May 2024. When we all could see it was rapidly turning to poop.
Maxwell Smart had the cone of silence. These guys (RBNZ and Stats) are all in the cone of no bloody idea.
I have lived in NZ at the Mount for 21 years now and am lucky enough to be comfortably off and able to enjoy what the country offers, but sadly, i think it is going backwards and at an increasing pace. Economically and socially the divide is widening, our politicians are intellectually and morally stunted, our health and education services are worsening by the day, we worship at the alter of grossly overpriced and all too often poorly built houses, while bemoaning the fact that most of our young are priced out the market.
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