Inflation continues to drive up the cost of living for New Zealanders. Photo / 123RF
The Data Set is a column exploring and explaining the data that affects our lives. Today, NZME’s head of newsroom data Chris Knox digs into inflation numbers and interest costs.
Unprecedented inflation is driving
up the cost of living for everyone, but changes to official figures in 1999 mean that homeowners’ cost increases are higher still.
There are figures available that provide a better estimate of the impact of current economic conditions on your household than the headline numbers.
These figures also provide a more realistic measure of cost of living increases, and ought to be used as the basis of pay negotiations related to the cost of living.
Inflation for the year to September was 7.2 per cent. Readers will be quick to point out that inflation in the year to June 1987 was 18.9 per cent, and therefore a mere 7.2 per cent is hardly unprecedented.
However, both the way inflation is measured and the way inflation is managed has changed since the 1980s. These changes mean that the inflation figures alone are insufficient to understand the impact of our current economic situation on individual households.
Following the horrendous inflation of the 1980s, in 1990 the Reserve Bank was instructed to limit inflation to between zero and 2 per cent. Initially, the Reserve Bank used a range of tools to control inflation, but in March 1999, following international convention, the official cash rate (OCR) was introduced, and was the only tool for managing inflation until recently.
The OCR influences the rate at which people can borrow money. The Reserve Bank lifts the OCR if it wants to lower inflation.
Before the introduction of the OCR in 1999, the cost of mortgage interest payments was included in the official measure of inflation. The introduction of the OCR required the removal of interest costs from the official figures. If mortgage interest payments continued to be included in inflation, then increasing the OCR would just increase inflation. But for many households, mortgage payments are a significant and increasing cost.
Stats NZ releases a non-standard inflation series that includes the cost of mortgage interest. In recent years, ‘inflation plus interest’ has been lower than official inflation. But in the last quarter, ‘inflation plus interest’ was 8.2 per cent – one percentage point higher than official inflation.
The difference between these two numbers will increase as mortgage rates rise and more households have to re-fix their mortgages at higher interest rates. There could even be a period where the official inflation numbers are falling while households’ costs continue to increase.
The list of things that are included in the official inflation numbers is called the consumer price index (CPI) basket. Its purpose is to measure inflation across the entire economy as opposed to the inflation experienced by an individual household.
The selection of items included in the CPI basket has been described as being for ‘everyone and no-one’. The set of items included in the basket reflect cost changes around the country, but no individual household would ever purchase the ‘basket’.
Housing costs are one example of something for ‘everyone and no-one’. Mortgage payments are not included. The cost of buying a newly-built house, excluding the cost of the land, is included. This was one of the major drivers of the last year’s inflation. Changes in the cost of renting are included in the CPI. Relatively, few – if any – households rent, purchase a new house, and don’t have a mortgage.
In 2016 – partly due to the exclusion of mortgage interest costs from the CPI and its ‘everyone and no-one’ character – Stats NZ developed the household living-costs price indexes (HLPIs).
The HLPIs calculate inflation for a number of different household types. One Stats NZ publication even lists the HLPIs’ purpose as being for ‘adjustment of compensation or income’, while the CPI’s purpose is for ‘monetary policy’.
So, if you are heading into negotiations about ‘compensation or income’, make sure you are armed with the figures that best reflect your household.
HLPI figures are released each quarter a week after the official CPI announcement, and include data on 14 household types: beneficiaries, five groups based on household spending, five groups based on household income, Māori, superannuitants, and all households. Each household type has its own ‘basket’ that better reflects the costs experienced by those households.
Household spending (expenditure) is a better way to classify standard-of-living than household income. The household income groups are for comparison with other income-based studies. They are also probably a better basis to use in pay negotiations than spending data.
In the year to September, households of beneficiaries (6.5 per cent), super annuitants (6.8 per cent), the two lowest-income groups (7.0 per cent, 7.1 per cent) and the lowest expenditure group (6.5 per cent) experienced less than the headline inflation of 7.2 per cent.
The all households group (7.7 per cent), which is another national measure of inflation that includes mortgage payments, Māori households (7.7 per cent), the three highest income groups (8.0 per cent, 8.1 per cent, 8.3 per cent), and the four highest expenditure groups (7.3 per cent, 8.1 per cent, 8.0 per cent, 8.8 per cent) all experienced more than 7.2 per cent inflation.
When looking at what households actually spend, 80 per cent of New Zealand households experienced more inflation than the headline number. The 20 per cent of households that spend the most experienced 22 per cent higher costs than what is reflected in the headline number of 7.2 per cent.
Stats NZ provides us with a much richer set of data than just the official inflation figures, and we should make more use of this data as we work through our current situation with levels of inflation not seen since the Reserve Bank was instructed to manage inflation, the OCR was introduced, and mortgage interest was removed from the CPI basket.