The cost of living, Don Brash

The New Zealand CPI at 100: History and Interpretation
Sharleen Forbes and Antong Victorio (eds)
Victoria University Press, $40.00,
ISBN 9780864739667

To my considerable surprise, I enjoyed this book, and learnt much more than I expected from the diversity of writers who contributed chapters.

When prices first started being gathered in a serious way, the focus was on the “cost of living”, primarily for determining wage adjustments for “working class families”. The intention was that a man should be able to earn enough to keep a wife and three children at a basic standard of living. The consumer price index (CPI) was therefore a narrow one, focussed largely on the price of “the basics”. Even when coverage of the index was substantially widened in 1949 to include expenditure regarded as “non-essential or socially undesirable”, it was felt appropriate to exclude coverage of “luxury spending”, and alcoholic beverages, private motoring, holiday travel, hotel accommodation, sports expenses and telephone rentals were all excluded on those grounds.

Fast-forward to the present and we find that the most recent CPI Advisory Committee report in 2013 begins by recommending “that the principal use of the CPI remains to inform monetary policy setting”. Such a conclusion would not even have been understood in 1914 – there was no Reserve Bank of New Zealand until 1933!

As the purpose for which price data has been collected has changed, so also has the coverage of the index. From the narrow focus of a century ago, today the government statistician does his best to compile an index which as closely as possible represents the price of all the goods and services which New Zealand households acquire during the period under review.

In recounting how the coverage of the CPI has changed over the years, the book is a salutary reminder of just how much society has changed over the decades. For me, one of the most fascinating chapters is the one by Sharleen Forbes discussing the changes in the basket of goods and services covered by the index. Some have been in the index in some form for 100 years – bread, flour, milk, beef, men’s socks and electricity, for example. But, reflecting what Forbes refers to as “the demise of home baking”, some of the weights have changed enormously. In 1949, flour, sugar, eggs and butter made up 14.2 per cent of the average household’s spending on food; by 2011, that percentage had fallen to 2.8.

Many products have come and gone over the century: the price of saveloys was first added to the index in 1974 but removed in 2008. Older New Zealanders will be interested to learn that both silverbeet and swedes were removed from the index in 1980, and delivered milk was removed in 1999. Dried peas and clothes-wringers were deleted in 1955, LP records in 1965, hand lawnmowers in 1974.

The book also provides a reminder of how relative prices have changed, in some cases very substantially. It reminds us, for example, that when colour television was first introduced to the index, in 1975, the average price of a 26-inch colour set was $840, equivalent to $8,100 in today’s terms. And when semi-automatic washing machines with spin-dryers were added to the index in 1965, their average price was ₤109, equivalent to some $4,130 in today’s money. The relative price of many services, such as haircuts, on the other hand, has risen, which is exactly what economic theory would suggest.

Perhaps the biggest surprise for me was the chapter by Michael Reddell of the Reserve Bank, recounting the way in which the Bank’s attitude to inflation has changed over the decades. Why surprised? Because for most of the Bank’s history it was more focussed on maintaining the exchange rate than on inflation. Legislation establishing the Bank in 1933 didn’t mention inflation or the price level. As late as 1978, the Reserve Bank published a compendium of statistics which had no series for prices or inflation at all!

The most sobering aspect of the book was what has happened to prices over the last 100 years. Brian Easton warns about the dangers of comparing prices over a long period, and a chapter by Grant Scobie and John Gibson notes that the CPI almost certainly overstates the real increase in prices facing consumers because of a number of technical factors, including the difficulty of adequately adjusting for quality changes over a very long period of time.

But if it is true, as some media reports suggested when this book was first released (though I could not find confirmation of the fact in the book itself), that the prices facing consumers have increased by an average of 4.4 per cent annually for a century, that means that prices have on average doubled roughly every 16 years. Over a century, they have risen by some 60 times! Little wonder that savers don’t like holding onto cash.

 

Don Brash was Governor of the Reserve Bank of New Zealand from 1988 to 2002.

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Posted in History, Non-fiction, Politics & Law and Review
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