Consumers price index review: 2017 (revised) - Stats NZ

 
Consumers price index review:
               2017 (revised)
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Citation
Stats NZ (2018). Consumers price index review: 2017 (revised). Retrieved from www.stats.govt.nz.

ISBN 978-1-98-852872-4
First published in January 2018, revised in April 2018 by
Stats NZ Tatauranga Aotearoa
Wellington, New Zealand

Contact
Stats NZ Information Centre: info@stats.govt.nz
Phone toll-free 0508 525 525
Phone international +64 4 931 4600

www.stats.govt.nz
Consumers price index review: 2017 (revised)

Contents
Revision............................................................................................................................ 6

Purpose and summary ...................................................................................................... 6
    Purpose ................................................................................................................................. 6
    Summary of key points ......................................................................................................... 6
    About the CPI......................................................................................................................... 6
    About the CPI review ............................................................................................................. 7

Changes to the CPI basket ................................................................................................. 8
    Criteria for selecting basket items...................................................................................... 11
    Updating item specifications .............................................................................................. 12
    New price collection methods ............................................................................................ 12
    Information sources for the basket review ........................................................................ 12

Analysing the expenditure weights .................................................................................. 13
    Main changes to CPI weights .............................................................................................. 13
    Food ..................................................................................................................................... 14
    Alcoholic beverages and tobacco....................................................................................... 15
    Clothing and footwear ........................................................................................................ 15
    Housing and household utilities......................................................................................... 16
    Household contents and services ...................................................................................... 17
    Health .................................................................................................................................. 18
    Transport ............................................................................................................................. 19
    Communication .................................................................................................................. 20
    Recreation and culture ....................................................................................................... 21
    Education ............................................................................................................................ 22
    Miscellaneous goods and services ..................................................................................... 23
    CPI all groups plus interest ................................................................................................. 24
    Tradables/non-tradables .................................................................................................... 24

CPI pricing centres and regional expenditure weights ...................................................... 26
    Regional pricing centres ..................................................................................................... 26
    Regional expenditure weights versus population weights ............................................... 26
    Calculating regional expenditure weights ......................................................................... 26

Reweighting the basket................................................................................................... 28
    Background to reweighting ................................................................................................ 28

                                                                             3
Consumers price index review: 2017 (revised)

    Excluding out-of-scope expenditure .................................................................................. 28
    Price updating expenditure ................................................................................................ 30
    Volume adjustments ........................................................................................................... 31
    Managing cyclical or volatile expenditure ......................................................................... 32
    Household expenditure levels ............................................................................................ 32

Methods for deriving expenditure weights ....................................................................... 33
    Purchase of new housing .................................................................................................... 33
    Purchase of new motor cars ............................................................................................... 34
    Domestic air transport ........................................................................................................ 35
    International air transport .................................................................................................. 35
    Alcoholic beverages ............................................................................................................ 36
    Cigarettes and tobacco ....................................................................................................... 37
    Insurance services ............................................................................................................... 37
    Health services .................................................................................................................... 39
    Education ............................................................................................................................ 40
    Clothing and footwear ........................................................................................................ 40

Changing the CPI base period.......................................................................................... 41

Upcoming CPI work ........................................................................................................ 42
    Household living-costs price indexes review ..................................................................... 42
    Retrospective superlative index ......................................................................................... 42
    CPI rolling review ................................................................................................................ 42
    2020 CPI review ................................................................................................................... 42

                                                                          4
Consumers price index review: 2017 (revised)

List of tables and figures
List of tables
1    Items added to the CPI basket in 2017 .......................................................................................... 8
2    Items removed from the CPI basket in 2017 ................................................................................. 9
3    Changes to CPI basket item specifications in 2017 ..................................................................... 10
4    Tradable and non-tradable items added to the CPI basket ....................................................... 25
5    Information sources for out-of-scope adjustment factors ......................................................... 30
6    Volume adjustments for CPI items .............................................................................................. 31

List of figures
1    Consumers price index weights, group level ................................................................................ 7
2    Food, subgroup-level expenditure weights ................................................................................ 14
3    Alcoholic beverages and tobacco, class-level expenditure weights .......................................... 15
4    Clothing and footwear subgroup-level expenditure weights ..................................................... 16
5    Housing and household utilities, subgroup-level expenditure weights .................................... 17
6    Household contents and services, subgroup-level expenditure weights .................................. 18
7    Health, subgroup-level expenditure weights .............................................................................. 19
8    Transport, subgroup-level expenditure weights ........................................................................ 20
9    Communication, subgroup-level expenditure weights .............................................................. 21
10   Recreation and culture, subgroup-level expenditure weights ................................................... 22
11   Education, subgroup-level expenditure weights ........................................................................ 23
12   Miscellaneous goods and services, subgroup-level expenditure weights ................................. 24
13   CPI regional expenditure and population proportions .............................................................. 27

                                                                  5
Consumers price index review: 2017 (revised)

Revision
We revised this paper following corrections made to Household expenditure statistics: Year ended
June 2016.

Purpose and summary
Purpose
Consumers price index review: 2017 outlines the changes we made as a result of a review of the
consumers price index (CPI).

Summary of key points
   • We added 15 items to the CPI basket and removed 23.
   • Housing and household utilities, and miscellaneous goods and services had the biggest
     increases in weight. The weights for food; alcoholic beverages and tobacco; clothing and
     footwear; recreation and culture; and education also increased.
   • Increases were influenced by higher spending on restaurant meals and ready-to-eat-food,
     cigarettes and tobacco, home ownership (including additions and alterations), and
     insurance.
   • Transport had the biggest decrease in weight. The weights for household contents and
     services, health, and communication also decreased.
   • Decreases were influenced by lower spending on petrol and telecommunication services.
     We reviewed our method to calculate the weight for out-patient services which caused the
     decrease in health.

About the CPI
The CPI measures the changes in prices that households pay for goods and services. Price change
is measured by tracking the prices of individual items that make up a representative basket of
goods and services.

Each quarter we collect about 100,000 prices. We visit retail outlets such as supermarkets,
department stores, and clothing shops. We send about 2,500 surveys to a range of businesses each
quarter, including construction firms, medical centres, and used car yards. We visit websites to
collect prices for things like streaming services, software, and private accommodation rented from
others. We also collect data from various other sources, including scanner data for consumer
electronics such as televisions, laptops, and mobile phones.

The CPI has a broad range of users. The Reserve Bank may adjust the official cash rate based on
the CPI, which may mean banks adjust their interest rates. This will affect mortgage interest rates,
and returns on investments for those saving money. Other government agencies may use the CPI
to adjust payments such as Jobseeker Support and Superannuation. The CPI also helps to inform
wage negotiations between employers, employees, and trade unions by reflecting changes in the
cost of living.

                                                 6
Consumers price index review: 2017 (revised)

CPI infographic has more information on the CPI.

About the CPI review
We review the CPI every three years to ensure the index remains relevant. Household spending
patterns change over time as tastes, lifestyles, and incomes change, and as the range of goods and
services available for households to acquire changes.

Spending patterns also change as a result of relative price change. Households tend to buy more
of goods and services that become relatively cheaper and less of goods and services that become
relatively more expensive. For example, if apple prices increased a lot, but pear prices increased
only a little, consumers might be expected to purchase more pears and fewer apples than before.

The 2017 review has reselected the basket, and updated the relative importance of the items
within it. This is to reflect spending patterns for the year to June 2016 (2015/16). Previous weights
were based on spending patterns for the year to June 2013 (2012/13).

Figure 1 compares the new September 2017 weights for the 11 CPI groups with the June 2014 and
June 2011 quarter weights.

Figure 1
1      Consumers price index weights, group level
                            Consumers price index weights
                                    Group level
                                Food

     Alcoholic beverages and tobacco

                Clothing and footwear

       Housing and household utilities

     Household contents and services

                               Health

                            Transport

                      Communication

                                                                              2011
               Recreation and culture
                                                                              2014
                            Education                                         2017

    Miscellaneous goods and services

                                         0   5   10             15       20          25
                                                      Percent

  Source: Stats NZ

                                                  7
Consumers price index review: 2017 (revised)

Changes to the CPI basket
As part of the 2017 basket review we have:
   • added 15 items
   • removed 23 items
   • changed specifications for items.
There are now 701 items in the CPI basket, down from 709 after accounting for additions,
removals, and changes to product specifications.

Table 1 lists the items added to the basket.

Table 1
1      Items added to the CPI basket in 2017
 Items added to the CPI basket in 2017
 Item                       Details
 Fresh herbs                Have grown in relative importance.
 Olives                     Have grown in relative importance.
 Flavoured tea              Flavoured and herbal tea has grown in relative importance.
 Hem of trousers            Repairs and alterations to clothing has grown in relative
                            importance.
 Food preparations          Mixers, blenders, juice extractors, food processors have grown
                            in relative importance.
 Storage costs              Have grown in relative importance.
 Hearing aids               Added to improve coverage of health equipment. Have also
                            grown in relative importance.
 Physiotherapist fees       Significant household expenditure. Added to improve coverage
                            of medical services.
 Bicycle helmets            Added to represent safety devices for transport. Have grown in
                            relative importance.
 Cellphone cases            Added to represent cellphone accessories. Significant
                            household expenditure.
 Headsets/headphones        Significant household expenditure. Added to improve coverage
                            of audio-visual equipment.
 Pet insecticides           Significant household expenditure. Added to improve coverage
                            of pets and pet related supplies.
 Admission charges to       Significant expenditure. Added to improve coverage of cultural
 zoos                       services.
 Private                    Has grown in relative importance. Added to improve coverage
 accommodation rented       of accommodation services which has grown in relative weight.
 from others
 Body massages              Has grown in relative importance. Added to improve coverage
                            of personal care which has grown in relative weight.
 Source: Stats NZ

                                                 8
Consumers price index review: 2017 (revised)

Table 2 lists the items removed from the basket.

Table 2
2      Items removed from the CPI basket in 2017
 Items removed from the CPI basket in 2017
 Item                      Details
 Alfalfa sprouts           Relatively low expenditure; celery and lettuce remain in the
                           basket.
 Spring onions             Relatively low expenditure; onions remain in the basket.
 Taro                      Relatively low expenditure; kumara and potatoes remain in the
                           basket.
 Canned corn               Relatively low expenditure; canned tomatoes remain in the
                           basket.
 Luncheon meat             Relatively low expenditure; bacon, salami, sausages, and ham
                           remain in the basket.
 Cottage cheese            Relatively low expenditure; cheddar cheese, camembert
                           cheese, and processed cheese slices remain in the basket.
 Takeaway milkshakes       Relatively low expenditure; ready-to-eat, takeaway, and fast
                           food already sufficiently represented in the basket.
 Liqueurs (on-licence)     Relatively low expenditure; spirits, liqueurs, spirit-based drinks
                           (all off-licence), spirits, and spirit-based drinks (both on licence)
                           remain in the basket.
 Interior wallboard        Relatively low expenditure; sufficient items of property
                           maintenance materials remain in the basket.
 Wall paper roll           Declining expenditure; relatively low expenditure; sufficient
                           items of property maintenance materials remain in the basket.
 Sewing machines           Declining expenditure; relatively low expenditure.
 Antacids                  Relatively low expenditure; sufficient other pharmaceutical
                           products remain in the basket.
 In-car satellite
 navigation units          replaced by satellite navigation applications on cellphones.
 Home line connection      Relatively low expenditure.
 charges
 DVD, Blu-ray players,     Declining expenditure.
 and player/recorders
 MP3 players               Declining expenditure.
 Set-top boxes for         Declining expenditure.
 television sets
 External computer hard    Declining expenditure.
 drives
 Soft toys                 Relatively low expenditure; dolls remain in the basket.
 Hire of DVD discs         Declining expenditure.
 Domestic package          Relatively low expenditure.
 holidays

                                                   9
Consumers price index review: 2017 (revised)

 Items removed from the CPI basket in 2017
 Item                      Details
 Prams, pushchairs         Relatively low expenditure; declining expenditure.
 Cheque-book fees          Abolished.
 Source: Stats NZ

Table 3 summarises the changes to product specifications.

Table 3
3      Changes to CPI basket item specifications in 2017
 Changes to CPI basket item specifications in 2017
 Item                      Details

 Chicken (whole, frozen)   We previously priced sizes 16 24, we now price 1.5kg or higher.
 Beer (off licence)        We expanded the sample to include craft beers.
              hosiery

                           quarterly basis from department stores.
 New vehicles              We reviewed and updated the models of cars we collect prices
                           for:
                              • five models changed to similar but more popular models
                                 of the same make
                              • two models removed
                              • five models added, including one electric car model.

 Taxi fares                We expanded the sample to include ride-sharing services.
 Stamps and postage-       We reviewed the sample of postage goods and services we
 paid packaging            collect prices for. We removed postage-paid envelopes (C5,
                           bubble, fast post) from our collection as this service is no longer
                           provided by NZ Post.
 Cellphone services        We reviewed and updated the cellphone services item.
                           Previously we collected prices for prepaid cellphone services
                           and cellphone pricing plans as part of the same sample for
                           cellphone services.

                           We split cellphone services into two separate items with
                           separate relative weights:
                              • prepaid cellphone cards and other top-ups
                              • cellphone pricing plans.
 International flights     We expanded the sample to include five additional
                           destinations. One to each of Australia, Pacific Islands, and Asia;
                           and two to North America.
 Kittens                   We removed kittens as a separate item from our price collection
                           for pets, as kitten prices are collected as part of the cats sample.

                                                10
Consumers price index review: 2017 (revised)

 Changes to CPI basket item specifications in 2017
 Item                        Details
 Subscriptions and           We reviewed and updated the sample of sports clubs
 donations to sports         subscriptions we collect prices for:
 clubs                          • subscriptions to bowls clubs was removed
                                • subscriptions to football clubs was added
 International package       The transport module in the HES has changed resulting in the
 holidays                    removal of international package holidays and the introduction
                             of a combined international flights and accommodation
                             subgroup.
                             We reviewed and updated our presentation of the international
                             package holidays, international air transport, and international
                             accommodation services subgroups and classes.
                             We removed international package holidays from the CPI
                             basket of goods and services. We added overseas
                             accommodation prepaid in New Zealand to the basket.
                             As a result, the relative weight of the accommodation services
                             subgroup and the air transport subgroup increased, while the
                             former package holidays subgroup was removed from the
                             relative weights.
 Instruction books           We reviewed the types of instruction books we collect prices for
                             as part of our sample. We removed two types of instruction
                             books as we feel the item is sufficiently represented by prices
                             collected for:
                                • health books
                                • technical books.

 Source: Stats NZ

100 years of CPI basket change provides an interactive visualisation of selected basket additions
and removals in the CPI over the 100 years from 1914 to 2014.

See                      Consumers price index review: 2017
for a full list of the items in the 2017 CPI basket.

Criteria for selecting basket items
Basket items are selected to represent the much wider range of goods and services households
purchase. We include particular items in the basket to ensure there is a good representation
across the groups, subgroups, classes, and sections. We select more items for classes and sections
where there is a relatively high variation in price change (ie where the prices of items in the class or
section tend to move differently), than for classes and sections with little variation (ie where prices
move similarly).

                                                   11
Consumers price index review: 2017 (revised)

We typically add items that have grown in relative importance to the point where they make up a
significant share of household spending. We remove items that have declined in relative
importance to the point where they no longer have a significant share of household spending.

Another aim of the basket review is to add new goods and services that have become available
since the previous review, provided household spending has reached a significant level. We may
also add items that have historically made up a significant share of household spending, but have
been excluded from the basket due to difficulty collecting prices and/or adjusting the collected
prices to account for changes in the quality of the products (quality adjustment).

Updating item specifications
We made some changes to the specifications (eg models, varieties) of some items as a result of
reviewing the basket (see table 3 above). However, we did not
specifications as part of the 2017 CPI review.

New price collection methods
Between the 2014 and 2017 CPI reviews we trialled and implemented new price collection
techniques from alternate data sources. By adopting collection from secondary data sources we
are able to increase the scope and accuracy of our pricing while reducing respondent burden.

For purchase of second-hand cars in the transport group, we now use administrative data from
New Zealand Transport Agency to collect more prices and more specifications for hedonic price
modelling.

The September 2017 quarter was also the first time we collected prices for certain items using
web-scraping and API querying. This reduces manual processing time and the chance of human
error. Web-scraping also allows us to collect prices for those harder-to-get service providers such
as online accommodation and transport, and private accommodation rented from others.

Work is continuing on exploring new approaches and data sources for the CPI. For more
information on our broader work on transforming our data collection methods, see our paper
Towards a big data CPI for New Zealand, which was presented at the Ottawa Group meeting last
year.

Information sources for the basket review
The 2017 basket review was informed by the lower-level 2012/13 and 2015/16 Household
Economic Survey (HES) expenditure data, feedback from CPI price collectors, supermarket scan
data from the Nielsen Company, retail transaction data obtained from market research company
GfK, and information provided directly by businesses and government organisations.

The HES was filled out by a sample of 3,500 households. The number of households represented
by the HES sample increased about 3.0 percent, from about 1,640,800 to about 1,690,400
households.

                                                 12
Consumers price index review: 2017 (revised)

Analysing the expenditure weights
This chapter analyses changes to the CPI weights.

The following analysis provides graphs of the new CPI weights, compared with 2014 and 2011.
Note that the 2017 weights are for September 2017 while the 2014 and 2011 weights are for June
2014 and June 2011.

Tables 1 and 2 in Consumers price index review: 2017 tables
CPI expenditure weights at the September 2017 quarter. The tables also include the expenditure
weights at the June 2011 and June 2014 quarters.

We publish the expenditure weights and indexes at group, subgroup, and class level. These
weights are fixed, down to the class level, until the next reweight scheduled for 2020. We will
monitor the relative weights below the class level of the New Zealand household expenditure
classification and may adjust them where necessary to reflect volume-related shifts in relative
importance.

Expenditure for the year to June 2016 (the weight reference period) was price updated to the
September 2017 quarter (the price reference period). The effect of price updating is to calculate
how much households would have to spend in the September 2017 quarter to purchase the same
quantity (volume) of goods and services purchased in the year to June 2016.

Expenditure on the goods and services purchased in 2015/16 is 2.75 percent higher after price
updating to the September 2017 quarter.

Main changes to CPI weights
The 2017 CPI weights show increases (from 2014 to 2017) in the relative importance of:
   • restaurant meals and ready-to-eat food (from 4.35 percent in 2014 to 4.93 percent in 2017)
   • cigarettes and tobacco (from 2.30 percent to 2.63 percent)
   • purchase of new housing (including additions and alterations (from 4.20 percent to 5.50
     percent)
   • property rates and related services (from 3.18 percent to 3.54 percent)
   • purchase of vehicles (from 3.48 percent to 4.47 percent)
   • insurance (from 2.50 percent to 3.00 percent).
The 2017 CPI weights show decreases (from 2014 to 2017) in the relative importance of:
   • grocery food (from 7.04 percent in 2014 to 6.60 percent in 2017)
   • property maintenance (from 3.09 percent to 2.14 percent)
   • household energy (from 4.54 percent to 4.14 percent)
   • furniture, furnishings, and floor coverings (from 1.47 percent to 1.11 percent)
   • petrol (from 5.03 percent to 4.06 percent)
   • telecommunication services (from 3.16 percent to 2.48 percent)
   • audio-visual and computing equipment (from 1.16 percent to 0.98 percent).

                                                  13
Consumers price index review: 2017 (revised)

Food
The food group has a September 2017 quarter expenditure weight of 19.25 percent, compared
with 18.84 percent in 2014.

When we express the food purchased in 2012/13 and 2015/16 in June 2014 and September 2017
quarter prices, respectively, spending rose 12.13 percent. This increase was partly influenced by a
3.39 percent increase in food prices from the June 2014 quarter to the June 2017 quarter.

The main information source we used to reweight the food group was the 2015/16 HES. However,
because the HES does not provide accurate information for some food items (eg confectionery
and soft drinks), we also sourced information from food manufacturers and distributors, and from
supermarket scan data (from the Nielsen Company).

The relative importance of the restaurant meals and ready-to-eat food subgroup increased from
4.35 percent to 4.93 percent, due to a 24.32 percent increase in spending.

The relative importance of grocery food decreased from 7.04 percent to 6.60 percent, due to a
relatively small expenditure increase of 2.95 percent.

Figure 2 compares the September 2017 expenditure weights for the food subgroups with those for
2011 and 2014.

Figure 2
2      Food, subgroup-level expenditure weights
                                            Food
                              Subgroup level expenditure weights

 Fruit and vegetables

Meat, poultry, and fish

         Grocery food

        Non-alcoholic
         beverages                                                          2011
                                                                            2014

Restaurant meals and                                                        2017
  ready-to-eat food

                          0             2            4             6                8
                                                  Percent
  Source: Stats NZ

                                                            14
Consumers price index review: 2017 (revised)

Alcoholic beverages and tobacco
The alcoholic beverages and tobacco group has a September 2017 quarter expenditure weight of
7.11 percent, compared with 6.96 percent in 2014.

The relative weight of alcoholic beverages decreased from 4.66 percent in 2014 to 4.48 percent in
2017. This is due to decreases in the relative weight for all the alcoholic beverage classes: beer and
spirits and liqueurs. These decreases are due to an increase in the relative proportion of off-licence
purchases to on-licence purchases reported in the HES.

The relative weight of cigarettes and tobacco increased from 2.30 in 2014 to 2.63 in 2017. Prices
have risen about 37.26 percent since the June 2014 quarter due to regular increases in excise
taxes. Increases in price were partly offset by a decrease in the volume of cigarettes and tobacco
purchased.

Figure 3 compares the September 2017 expenditure weights for the alcoholic beverages and
tobacco classes with those for 2011 and 2014.

Figure 3
3      Alcoholic beverages and tobacco, class-level expenditure weights
                              Alcoholic beverages and tobacco
                                 Class level expenditure weights

                Beer

               Wine

                                                                               2011
                                                                               2014
 Spirits and liqueurs
                                                                               2017

     Cigarettes and
        tobacco

                        0.0        0.5     1.0      1.5         2.0      2.5          3.0
                                                 Percent

 Source: Stats NZ

Clothing and footwear
The September 2017 quarter expenditure weight for clothing and footwear is 4.36 percent, up
from 4.21 percent in the June 2014 quarter. Spending on clothing and footwear increased 13.81
percent from the 2012/13 weights expressed in June 2014 quarter prices to the 2015/16 weights

                                                           15
Consumers price index review: 2017 (revised)

expressed in September 2017 prices. Prices increased 1.22 percent between the June 2014 quarter
and the September 2017 quarters.

Figure 4 compares the September 2017 expenditure weights for the clothing and footwear
subgroups with those for 2011 and 2014.

Figure 4
4      Clothing and footwear subgroup-level expenditure weights
                           Clothing and footwear
                       Subgroup level expenditure weights

    Clothing

   Footwear                                                              2011
                                                                         2014
                                                                         2017

               0.0   0.5    1.0    1.5     2.0     2.5   3.0       3.5      4.0
                                         Percent
  Source: Stats NZ

Housing and household utilities
Housing and household utilities remains the largest weighted group in the CPI. Its weight
increased from 24.23 percent in the June 2014 quarter to 24.51 percent in the September 2017
quarter.

The group s increase was influenced by increases in the relative weights for home ownership, and
property rates and related services. These increases were offset by decreases in the relative
weights for housing rentals, property maintenance, and household energy.

Spending on home ownership (which includes both construction of new houses, and alterations
and additions to existing houses) increased 43.50 percent, which was influenced by a 19.58
percent increase in prices.

Spending on property rates and related services increased 21.93 percent, which was influenced by
a 16.25 percent price increase.

Housing rentals expenditure increased 9.43 percent, but due to other areas with stronger growth,
the relative weight for housing rentals showed no real change between the June 2014 quarter and
the September 2017 quarter (9.22 percent versus 9.20 percent respectively).

                                                   16
Consumers price index review: 2017 (revised)

Figure 5 compares the September 2017 expenditure weights for the housing and household
utilities subgroups with those for 2011 and 2014.

Figure 5
5      Housing and household utilities, subgroup-level expenditure weights
                             Housing and household utilities
                             Subgroup level expenditure weights

   Rentals for housing

     Home ownership

Property maintenance

   Property rates and
    related services
                                                                      2011
                                                                      2014
    Household energy                                                  2017

                         0           2        4              6    8          10
                                                  Percent

  Source: Stats NZ

Household contents and services
The household contents and services group has a September 2017 quarter expenditure weight of
4.38 percent, compared with 4.65 percent in 2014.

This decrease is largely caused by a 16.86 percent decrease in spending on furniture, furnishings,
and floor coverings. Spending on this subgroup increased 12.7 percent between 2011 and 2014,
influenced by a rebound from low spending on furniture during the six-quarter economic
recession that began in March 2008.

Figure 6 compares the September 2017 expenditure weights for the household contents and
services subgroups with those for 2011 and 2014.

                                                            17
Consumers price index review: 2017 (revised)

Figure 6
6      Household contents and services, subgroup-level expenditure weights
                            Household contents and services
                             Subgroup levelexpenditure weights

Furniture, furnishings,
 and floor coverings

   Household textiles

Household appliances

       Glassware,
     tableware, and
   household utensils
                                                                        2011
Tools and equipment
for house and garden                                                    2014
                                                                        2017
  Other household
supplies and services

                          0.0         0.5         1.0        1.5               2.0
                                                Percent
  Source: Stats NZ

Health
The health group has a September 2017 quarter expenditure weight of 3.78 percent, down from
3.94 percent in 2014.

The decrease is due to a change in the method we used to estimate expenditure for some
outpatient services. The method involved using HES expenditure data and supplementing it with
insurance claims. When reviewing this method and comparing results with other sources, we
determined the method we used before included income from non-household sources, and
therefore over-estimated expenditure.

Figure 7 compares the September 2017 expenditure weights for the health subgroups with those
for 2011 and 2014.

                                                        18
Consumers price index review: 2017 (revised)

Figure 7
7      Health, subgroup-level expenditure weights
                                       Health
                          Subgroup level expenditure weights

     Medical products,
     appliances, and
       equipment

   Out-patient services

                                                                    2011
      Hospital services                                             2014
                                                                    2017

                          0          1            2            3            4
                                               Percent
  Source: Stats NZ

Transport
The transport group has a September 2017 quarter expenditure weight of 13.97 percent, down
from 14.97 percent in the June 2014 quarter.

This decrease is mainly driven by petrol. The weight for petrol decreased from 5.03 percent to 4.06
percent. Total spending on petrol decreased 11.58 percent, which was influenced by a decrease of
12.62 percent in prices between June 2014 and September 2017.

The weight for purchases of vehicles increased from 3.48 percent in 2014 to 4.47 percent in 2017.
The expenditure on purchase of vehicles increased 40.89 percent between June 2014 quarter and
September 2017 quarter.

The weight for international air transport increased from 1.45 percent to 1.82 percent, while
domestic air transport decreased from 0.68 percent to 0.56 percent.

Figure 8 compares the September 2017 expenditure weights for the transport subgroups with
those for 2011 and 2014.

                                                      19
Consumers price index review: 2017 (revised)

Figure 8
8      Transport, subgroup-level expenditure weights
                                     Transport
                             Subgroup expenditure weights

  Purchase of vehicles

   Private transport
 supplies and services

                                                                     2011
  Passenger transport                                                2014
       services
                                                                     2017

                         0        2         4              6    8           10
                                                Percent
  Source: Stats NZ

Communication
The communication group has a September 2017 quarter expenditure weight of 3.20 percent,
down from 3.61 percent at the June 2014 quarter.

Within this group the weight for telecommunication equipment increased from 0.29 percent in
2014 to 0.61 percent.

The weight for telecommunication services decreased from 3.16 percent to 2.48 percent.

Figure 9 compares the September 2017 expenditure weights for the communications subgroup
with those for 2011 and 2014.

                                                      20
Consumers price index review: 2017 (revised)

Figure 9
9      Communication, subgroup-level expenditure weights
                                   Communication
                            Subgroup level expenditure weights

    Postal services

                                                                               2011
Telecommunication                                                              2014
    equipment                                                                  2017

Telecommunication
     services

                      0.0     0.5     1.0     1.5     2.0    2.5         3.0      3.5
                                                Percent
  Source: Stats NZ

Recreation and culture
The recreation and culture group has a September 2017 quarter expenditure weight of 9.40
percent, the same as that for the June 2014 quarter.

The weight for audio-visual and computing equipment fell from 1.16 percent to 0.98 percent,
influenced by prices decreasing 29.13 percent between June 2014 and September 2017.

The weight for other recreational equipment and supplies increased from 2.23 percent to 2.40
percent, driven by a 25.92 percent increase in expenditure on pets and pet-related products.

We made a change to the structure of the accommodation services, and package holidays
subgroups. This was a result of changes to the HES module for package holidays. The HES asked
households for their expenditure on flights and accommodation instead of expenditure on
package holidays. During the 2017 CPI review, we changed our approach to this by dropping
package holidays from the basket and increasing the relative weights for accommodation services
and air transport (however, we will still continue to price the main components of a package
holiday). We added overseas accommodation prepaid in New Zealand, which took most of the
relative weight previously assigned to international package holidays. People still spend for
package holidays, but many are increasingly booking their own holidays and flights online. As a
result, the relative weight for the package holidays subgroup dropped from 1.13 percent in June
2014 to zero in September 2017. Consequently, the relative weight for accommodation services
increased from 0.48 percent in the June 2014 quarter to 1.71 percent in the September 2017
quarter. Together, the combined relative weight of accommodation services and package holidays
increased from 1.61 percent in the June 2014 quarter to 1.71 percent in September 2017. The

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Consumers price index review: 2017 (revised)

relative weight of international air transport (which is in the transport group) increased from 1.45
percent in the June 2014 quarter to 1.82 percent in the September 2017 quarter.

Figure 10 compares the September 2017 expenditure weights for the recreation and culture
subgroups with those for 2011 and 2014.

Figure 10
10     Recreation and culture, subgroup-level expenditure weights
                                Recreation and culture
                            Subgroup level expenditure weights

    Audio-visual and
  computing equipment

  Major recreational and
   cultural equipment

  Other recreational
equipment and supplies

       Recreational and
       cultural services

   Newspapers, books,
     and stationery
                                                                          2011
        Accommodation
                                                                          2014
           services
                                                                          2017
      Package holidays

                           0.0     0.5     1.0     1.5     2.0      2.5       3.0
                                                 Percent
  Source: Stats NZ

Education
The education group has a September 2017 quarter expenditure weight of 2.01 percent, up from
1.91 percent in the June 2014 quarter.

Much of the increase came from tertiary and other post-school education, which had increased
spending of 26.53 percent.

Figure 11 shows the September 2017 expenditure weights for the education subgroups with those
for 2011 and 2014.

                                                      22
Consumers price index review: 2017 (revised)

Figure 11
11     Education, subgroup-level expenditure weights
                                        Education
                             Subgroup level expenditure weights

        Early childhood
          education

 Primary, intermediate,
    and secondary
      education

Tertiary and other post-
   school education

                                                                          2011
                                                                          2014
Other educational fees
                                                                          2017

                           0.0      0.2       0.4             0.6   0.8          1.0
                                                    Percent
  Source: Stats NZ

Miscellaneous goods and services
The miscellaneous goods and services group has a September 2017 quarter expenditure weight of
8.02 percent, up from 7.28 percent in the June 2014 quarter.

Most of this increase came from insurance, which increased from 2.50 percent to 3.00 percent
influenced by higher prices for dwelling and health insurance. Within insurance, dwelling
insurance increased from 0.41 percent to 0.60 percent, while life insurance increased from 1.02
percent to 1.20 percent.

Figure 12 shows the September 2017 expenditure weights for the miscellaneous goods and
services subgroups with those for 2011 and 2014.

                                                          23
Consumers price index review: 2017 (revised)

Figure 12
12     Miscellaneous goods and services, subgroup-level expenditure weights
                       Micellaneous goods and services
                       Subgroup level expenditure weights

          Personal care

        Personal effects

              Insurance

         Credit services
                                                                        2011
                                                                        2014
    Other miscellaneous
                                                                        2017
          services

                           0.0   0.5   1.0     1.5        2.0     2.5          3.0
                                             Percent
  Source: Stats NZ

CPI all groups plus interest
We excluded interest payments from the CPI since 1999, but have produced an analytical CPI all
groups plus interest series since then. The interest component of this index has a September 2017
quarter weight of 7.34 percent, down from 7.37 percent in the June 2014 quarter.

Mortgage interest has a September 2017 quarter weight of 5.83 percent, up from 5.62 percent in
the June 2014 quarter.

The main source of information for interest expenditure weights was the money, credit, and
financial statistics published by the Reserve Bank of New Zealand.

Our household living-cost price indexes (HLPI) also include interest.

Tradables/non-tradables
Tradables are goods and services that are imported or that are in competition with foreign goods
and services, either in domestic or foreign markets. Non-tradables are goods and services that do
not face foreign competition.

Table 4 shows which of the items we added to the basket of goods and services this year are
tradable and non-tradable.

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Consumers price index review: 2017 (revised)

Table 4
4      Tradable and non-tradable items added to the CPI basket
 Tradable and non-tradable items added to the CPI basket

 Tradable                                   Non-tradable

 Fresh herbs                                Hem of trousers
 Olives                                     Storage costs
 Flavoured tea                              Hearing aids
 Food preparations, mixers, and blenders    Physiotherapist fees
 Bicycle helmets                            Admission charges to zoos
 Cellphone cases                            Private accommodation rented from others
 Headsets/phone sets                        Body massages
 Pet insecticides
 Source: Stats NZ

The September 2017 quarter expenditure weight of the tradables component is 42.53 percent,
compared with 43.59 percent in 2014. The September 2017 quarter expenditure weight of the non-
tradables component is 57.54 percent, compared with 56.41 percent in 2014.

See table 6 in Consumers price index review: 2017 tables
tradables/non-tradables CPI weights.

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Consumers price index review: 2017 (revised)

CPI pricing centres and regional expenditure weights
This chapter describes the structure of our regional pricing centres and the regional expenditure
weights.

CPI prices are collected from 12 regional pricing centres within five broad regions (Auckland,
Wellington, rest of North Island, Canterbury, and rest of South Island).

We use regional weights to ensure price changes in a region with a larger population (eg Auckland)
will have a greater effect on the national CPI than price changes in a region with a smaller
population (eg Wellington). Instead of using the population weight of a region to determine its
regional weight in the CPI, we base our regional weights on regional household spending from the
HES.

Regional pricing centres
The 12 regional pricing centres are: Whangarei, Auckland, Hamilton, Tauranga, Napier-Hastings,
New Plymouth, Palmerston North, Wellington, Nelson, Christchurch, Dunedin, and Invercargill.

Regional expenditure weights versus population weights

price change, and regional spending patterns to weight the individual basket items within each
region. In contrast, regi
regional price change and national spending patterns to weight the individual basket items in
each region.

Regional expenditure weights give a higher weight to regions with more spending per person
compared with regional population weights. For example, 36.16 percent of household expenditure
is from households in Auckland, which has 34.41 percent of the population. This means that, on
average, price changes in Auckland will have a greater influence on the CPI using regional
expenditure weights than regional population weights.

Regional expenditure weights also give higher weights to items within a region where relative
expenditure is higher than the national average. For example, housing and household utilities has
a national expenditure weight of 24.51 percent, but makes up 26.29 percent of household
expenditure in Auckland. This means price change for housing and household utilities in Auckland
has more influence on the Auckland index using regional expenditure weights, than regional
population weights, which use the national average weight. This produces more accurate regional
indexes.

Calculating regional expenditure weights
We calculated regional expenditure weights as proportions of national expenditure for each CPI
class or section (the lowest published level) using HES regional expenditure. We applied
class/section level proportions to the individual items within that class or section (eg the regional
proportions for fruit were applied to national expenditure on each fruit item) to derive regional
expenditure on each individual item (eg spending on apples in Auckland).

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Consumers price index review: 2017 (revised)

In some cases, HES data was not available, and/or household sample sizes were too small to
provide reliable regional breakdowns. Where this was the case we used data from other sources,
or population shares.

More than three-quarters of the regional expenditure weight was derived from the HES, while
14.23 percent came from other sources, and the remaining 8.09 percent used population shares.

Regional expenditure was then expressed in September 2017 quarter prices for the respective
region (eg apple expenditure in Auckland was expressed in September 2017 quarter apple prices
collected in Auckland).

For broad regions with multiple pricing centres (rest of North Island and rest of South Island), we
used population shares to allocate the regional expenditure weight to the pricing centres.

Figure 13                                                                                           e population.

Figure 13
13     CPI regional expenditure and population proportions
                CPI regional expenditure and population proportions
          Percent
     40
                                                2017 CPI weight                      Population
     35
     30
     25
     20
     15
     10
      5
      0
                Auckland           Wellington      Rest of North Island       Canterbury     Rest of South Island
  Source: Statistics New Zealand

See tables 3 and 4 in Consumers price index review: 2017 tables revised

                                                         27
Consumers price index review: 2017 (revised)

Reweighting the basket
This chapter explains how we reweighted the CPI basket.

Background to reweighting
We reweight the CPI every three years, on average, as part of regularly scheduled CPI reviews.
Reweighting ensures that the relative importance (expenditure weights) of the goods and services
in the CPI basket continue to reflect up-to-date household spending patterns. The frequency of
reweights is within the International Labour Organization (ILO) recommendation of at least once
every five years.

The 2017 reweight was based on data from the 2015/16 HES and other sources. The previous
reweight, completed in 2014, was based on the 2012/13 HES and other sources.

Data sources for reweighting the CPI basket
The HES is the primary information source for reweighting the basket. However, other sources are
also required, as the HES does not provide accurate expenditure estimates for some goods and
services.

HES respondents tend to under-report expenditure on some goods and services (eg tobacco and
alcohol). Large, infrequent purchases (eg new cars) may not be reported frequently enough by the
3,500 households in the survey to provide accurate estimates of total household expenditure.

We complemented the HES data with information from other sources, including Stats NZ surveys,
government administration data, retail transaction data, and information provided by businesses.

Over the last two CPI reviews (2014 and 2017), we changed our approach to make use of more HES
data, when estimates from other sources are close to the HES estimates. In the 2011 review, 54.5
percent of the CPI weights were derived from the HES. This increased to 70.8 percent in 2014. In
the 2017 CPI review, 66.8 percent of the CPI weights were derived from the HES.

What the basket represents
The goods and services in the CPI basket are a sample that represents the wider range of goods
and services households buy. The expenditure weights assigned to the 701 individual goods and
services in the new 2017 basket represent expenditure on those goods and services. In addition,
the expenditure weights also represent expenditure on similar goods and services not directly
included in the basket but expected to experience similar price change. For example, oranges and
mandarins are in the basket but lemons are not. Expenditure on lemons (and other citrus fruit not
in the basket) is allocated to oranges and to mandarins in proportion to spending directly on each
of these two citrus fruits.

Excluding out-of-scope expenditure
When we use other data sources for expenditure estimates, we often have to adjust the data so

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Consumers price index review: 2017 (revised)

The HES (and CPI) reference population is New Zealand-resident, private households living in
permanent private dwellings. This means that the reference population does not include:

    •   overseas visitors who expect to be resident in New Zealand for fewer than 12 months
    •   people living in non-private dwellings such as hotels, motels, boarding houses, hostels,
        motor camps, and homes for the elderly which provide medical care and services
    •   patients in hospitals
    •   residents of psychiatric and penal institutions; members of the permanent armed forces
    •   members of the non-New Zealand armed forces
    •   overseas diplomats.

Children, including those at boarding schools, are not surveyed in the HES, but expenditure on
behalf of those children by their parent or guardian is included.

spend four or more nights a week in the household. They must share food consumption or
contribute some portion of income towards providing the essentials for living as a group.

How we exclude out-of-scope data
Because the HES and CPI reference populations are the same, we do not need to adjust HES
expenditure when using this source to estimate expenditure weights.

However, a key step when we use other data sources to estimate expenditure weights is to adjust
our estimates so they include expenditure made only by the HES/CPI reference population. If we

sourced from the HES. In addition to the people listed above who are not covered by HES and CPI,
we also exclude expenditure by businesses and government.

We source other information from a wide range of providers. We asked data suppliers to report
expenditure information that closely matches the scope of the CPI where possible. However, many
providers were not able to break their data down to this level of detail, and instead provide data
with a wider scope. To account for this, we estimate what proportion of a particular expenditure
was in scope of the CPI.

We derived a set of specific adjustment ratios for various areas of the basket to exclude out-of-
scope expenditure. Appropriate ratios were then applied to the corresponding independently
sourced expenditures. For example, these ratios took into account the relative share of
expenditure by visitors from overseas, which varied significantly for different parts of the basket.

Table 5 shows some of the information sources used to derive the out-of-scope adjustment
factors.

                                                  29
Consumers price index review: 2017 (revised)

Table 5
4          Information sources for out-of-scope adjustment factors

5      Information sources for out-of-scope adjustment factors
    Information sources for out-of-scope adjustment factors
    Type of out-of-scope
                                                                     Information source             Breakdown
    expenditure
    Business and government                                          National accounts              Estimates proportion of
                                                                     household consumption          total retail spending by the
                                                                     expenditure                    business sector, by retail
                                                                                                    store type
    Non-private and non-                                             2013 Census                    Resident population
    permanent households
    Non-residents (overseas                                          Tourism satellite account      International visitor
    visitors)                                                                                       expenditure as a proportion
                                                                                                    of total supply, by product
    Source: Stats NZ

Price updating expenditure

the 2015/16 HES (although expenditure on some goods and services is collected in the HES on a
one-year recall basis, meaning that purchases can span the two-year period from July 2014 to
June 2016). When we used other sources to derive expenditure weights, we used information for
the year to June 2016 where possible.

by the ILO and is common international practice. The effect of price updating is to express the
quantities underlying the 2015/16 expenditure values in the prices of the September 2017 quarter,
the new price reference period. In general we used lower-level CPI indexes that correspond to the
goods and services in the new basket to price-update the expenditure weights.

Effect of price updating
After price updating to the September 2017 quarter, the new CPI expenditure weights were about
2.75 percent higher.

Price updating increased expenditure for 77.93 percent of the basket, by weight. Prices for
dwelling insurance increased by about 13.88 percent from 2015/16 to the September 2017 quarter.
Prices for cigarettes and tobacco increased 14.59 percent over the same period.

Price updating decreased expenditure for 21.64 percent of the basket, and the remaining 0.43
percent experienced no price change. Goods and services where price updating resulted in
reduced expenditure included: games and toys (down 14.94 percent), international air fares (down
11.72 percent), and accommodation services (down 7.50 percent).

We customised price updating indicators for some items, such as new vehicles,
telecommunications equipment, and audio-visual equipment and computing equipment, to
include rather than exclude quality improvements. In general, this reduced the downward effect of
price updating on the new weights, and in some cases, increased the 2015/16 weight.

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Consumers price index review: 2017 (revised)

Volume adjustments
CPIs are generally calculated using a base-weighted Laspeyres-type (or Lowe) formula that
measures the changing cost of acquiring a fixed basket of goods and services. The underlying

are held fixed.

We fix the underlying 2015/16 quantities in the Laspeyres-type price index formula over the life of
the index (from 2017 to 2020). We assume that these quantities will be broadly representative of
household purchases during the three-year life of the index (although we know that consumers
will, to some extent, substitute towards goods and services showing lower relative price change
during the period).

We also know that there were significant shifts in quantities for some goods and services between
the 2015/16 weight reference period and the September 2017 quarter price reference period.

As part of the reweight, we made volume adjustments to some of the underlying quantities. This
occurred selectively where there was strong evidence that a significant trend (rather than short-
term) change in volumes had taken place between the weight reference periods and the price
reference periods.

Although using selected adjustments introduces a level of subjectivity to the reweighting process,
we consider this preferable to steadfastly retaining the underlying 2015/16 quantities across the
whole basket. The aim of making these adjustments is to improve the relevance of the expenditure
weights during the period they will be used (2017 20).

before price updating, or incorporated into the indicator used to price update 2015/16
expenditures.

Table 6 lists the volume adjustments we made, the reasons for making them, and the data sources
used to determine whether to adjust and by how much. Note that volume change includes not
only change in physical quantities, such as the number of new vehicles acquired, but also change
in quality.

Table 6  tems

6      Volume adjustments for CPI items
Volume adjustments for CPI items
Goods or service  Reason for adjustment                 Information source
Cigarettes and    To reflect lower volumes,             Cigarettes and tobacco available for
tobacco           influenced by excise tax              consumption data for the years to June
                  increases                             2016 and June 2017
New cars          To allow us to better calculate       Vehicle registration information for the
                  weights for newer models and          years to June 2016 and June 2017
                  discontinued models
Telecommunication To reduce the downward                Volume and sales information available
equipment and     effect of price updating due to       from GfK administrative data
audio visual      quality adjustments
equipment
Source: Stats NZ

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