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 Is the price of "getting ahead" in the CPI?

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  •  Is the price of "getting ahead" in the CPI?

    Is the price of "getting ahead" in the CPI?

    This is one of those newly born ideas I'm going to need a little help to clarify.
    In my own mind as well as in yours.

    As you know, inflation is calculated based on a basket of goods.
    Some of the stuff in the basket is real, food, petrol..
    Some is less real, telecommunication for example.

    But Housing is really poorly handled.
    As far as I can tell (correct me if I'm mistaken), renting and paying a mortgage are considerd the same.
    It's just a cost to put a roof over a family.

    But I think this is a big mistake.
    The two are vastly different.
    And for clarity's sake should not be grouped.

    Because home ownership eventually lets you get ahead, unlike renting.
    And that's a separate product, or good, getting ahead I mean.

    See, once the mortgage is gone, there is free money for other things.
    The whole numeric value of inflation housing is twisted in this one number methodology.
    Making it a deceptive number, to be kind.


    This is just the start of an idea.

    Any thoughts on how to clarify it?



    Last edited by McDuck; 15-01-2021, 05:41 PM.

  • #2
    See here and here.
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    • #3
      Originally posted by McDuck View Post

      Is the price of "getting ahead" in the CPI?

      [...]

      Because home ownership eventually lets you get ahead, unlike renting.
      And that's a separate product, or good, getting ahead I mean.

      [...]


      I agree, but the purpose of CPI is to measure average change in prices over time that consumers pay for a defined basket of goods and services.

      “Getting ahead” or personal increases in wealth would not be considered as day to day consumption expenses and thus fall outside of the remit.

      As I understand it about 100,000 prices each quarter are tracked including housing rents, home ownership (the purchase of new housing, excluding land & existing houses), property maintenance (materials and services), rates, utility costs (water, refuse, electricity, gas), household contents (furniture, floor coverings, appliances etc.) house insurance.

      Mortgage interest is excluded from CPI.

      The problem as I see it is that housing inflation is out of step with general inflation.

      To expand, while we would expect house prices to rise over time as a function of general inflation, and for wage rises to somewhat compensate this (which they haven’t) the extent of the divergence in recent times between house price increases and general inflation is astonishing.

      To illustrate, Stats NZ informs us that the Consumer Price Index for the September 2020 quarter is 1.4% (annual). The next update is due in late January 2021.

      In contrast house price inflation is currently running at over 1% PER MONTH in some locations.


      Not surprisingly, numerous commentators are calling for a rethink on how CPI is measured. For example CPI excludes sales of existing houses because they don't add to the stock of housing available for households. Interestingly, CPI also excludes expenditure by landlords on, or relating to, the properties they rent out.

      So yes, in a sense, CPI is a “twisted one number methodology.”

      Don’t expect Change, because change would be met with stiff resistance as a Policy Targets Agreement (PTA) with the Reserve bank (RBNZ) requires them keep annual increases in the CPI between 1 and 3 percent on average over the medium term with a focus on keeping future average inflation near the 2 percent target midpoint. CPI is a tool. RBNZ use it to help set interest rates. The Government uses it to adjust benefits.

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      • #4
        There are some things which the CPI fails at. And badly. Those things may be better covered by the HLPIs.

        I recall one announcement years back that said the CPI had fallen because the price of AvGas and so international travel flights had fallen considerably. It seemed to be lost on the commentators that there would be quite a few NZ households to whom the prospect of o'seas travel equated to the liklihood of them buying a section on the moon.

        Lies, damned lies and statistics.
        Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

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        • #5

          CPI not new.


          During background research, I found that the idea of a CPI is not new.

          It's had several different names over time.

          And, historically, it didn't really matter how accurate it was.

          But..

          It got dragged into something else,

          something big.

          It got dragged into the most important decision of a country's financial decision making.

          It got dragged into the setting of our interest rates.

          and by default, into the Reserve Bank's "quality control self evaluation".

          So...now..

          it's really a very serious number.

          And, since it's no longer only an interesting toy, it needs to be made fit for purpose.


          Last edited by McDuck; 16-01-2021, 03:56 PM.

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