Bill Rosenberg: How to measure household inflation better than the CPI does

According to Statistics New Zealand's Consumers' Price Index (CPI) inflation is running above 7%, its highest level since 1990. The Reserve Bank, tasked with targeting CPI inflation of between 1% and 3%, has been aggressively increasing its Official Cash Rate, which means higher interest rates flow through to borrowers and savers.

Given the importance of the CPI as a measure of the changes in the price of goods and services for NZ households, do we have its settings right? What's in it, how is this determined and measured, and is a quarterly CPI release frequent enough?

To address all this we spoke with Bill Rosenberg in a new episode of interest.co.nz's Of Interest podcast. Rosenberg, now a Commissioner of the Productivity Commission, is the former Policy Director and Economist at the Council of Trade Unions. He was also one of nine people Statistics NZ appointed to a committee to independently review the CPI 10 years ago.

Rosenberg notes interest payments are excluded from the CPI. And while housing rentals and purchases of newly constructed dwellings excluding land are in, sales of existing houses are not. The CPI is "an index is designed for the Reserve Bank," Rosenberg says and the Household Living-Costs Price Indexes (HLPI), another Statistics NZ series, is a better measure of inflation for NZ households. It includes mortgage interest payments.

The latest HLPI figures show the annual inflation rate in the December quarter for all households was 8.2%, significantly higher than the CPI's 7.2%. 

The HLPI breaks out different indexes for all households being the average household, beneficiaries, Māori, superannuitants, highest-spending households and lowest-spending households. The CPI, in contrast, measures how inflation affects New Zealand as a whole. Thus the HLPI is able to show highest spending households experienced the biggest annual inflation increase of 9.4% in the December quarter because they spend more on interest payments than other household groups.

"I think there should be more focus on the HLPI, the Household Living-Cost Price Index," Rosenberg says.

"It's more representative of the costs that people face and people can actually go to it and see 'roughly speaking I'm [a] middle income household, I can see how my costs have been changing'," he says.