HLPIs Data Collection 2017

Conceptual design For any group of households, there are two basic ingredients for measuring inflation: commodity-level price change expenditure patterns to aggregate price change. We calculate HLPIs by using population-group-specific expenditure patterns from the Household Economic Survey. These provide the weights for the lowest-level price indexes in the CPI basket of goods and services (the coverage of HLPIs is the same as the CPI, except for owner-occupied housing and interest payments, as described below). The basket comprises about 700 commodities and is designed to be a representative sample of consumer spending. The Household Economic Survey expenditure patterns are aligned to CPI expenditure totals, to minimise known reporting bias in the survey. We use customised commodity-level price indexes for each household group, by applying group-specific store-type and region weights. The store-type weights (needed to calculated a weighted average price for a product sold in both supermarkets and convenience stores, for instance) use the expenditure by outlet information from the Household Economic Survey. Region weights reflect the regional distribution of households in each household-group. The conceptual design of the HLPIs differs from the CPI in two important ways. The treatment of owner-occupied housing and interest payments better aligns with individual household experience. The aggregation method we use better reflects the inflation experienced by a ‘typical’ household within each group. The reasons for these variations in approach are described below. These design decisions reflect the feedback we received from the public consultation on HLPIs (Statistics NZ, 2016). Owner-occupied housing The coverage of owner-occupied housing in the HLPIs includes mortgage interest payments and a link to market-value property prices. This treatment aligns better with the inflation experiences of owner-occupier households. Excluding these in the CPI – which instead tracks the cost of purchasing new dwellings (excluding land) – is a design choice that aligns with the CPI’s principal use for monetary policy purposes. Given that the CPI helps the Reserve Bank set the Official Cash Rate, including interest payments in the CPI would introduce a circularity to this measure. The HLPIs include all interest payments. Interest rate changes are quality-adjusted to maintain the purchasing power of the monetary amount of debt underlying these interest payments. Mortgage debt is quality-adjusted using a market-value property price index (Quotable Value’s house price index) and other debt is quality-adjusted using the CPI (as a broad measure of inflation). This conceptual treatment of owner-occupied housing is known as a ‘payment’ approach. This approach is noted by the International Labour Organisation (ILO, 2003) as often being used, “when the primary purpose of the index is for the adjustment of compensation or income”. The 2013 CPI Advisory Committee recommended this approach for HLPIs (Statistics NZ, 2013). The payment approach tracks the price change for goods and services ‘paid for’, regardless of when they are acquired or used. In contrast, the CPI uses an ‘acquisition’ approach, reflecting price changes for goods and services when they are acquired. The main practical difference between these approaches is on the measurement of housing, interest, and insurance. The acquisition-based CPI commodity-level price indicators can be translated to a payment approach with the following modifications: including interest payments excluding net acquisition of owner-occupied housing using gross expenditure weights for insurance. For HLPIs, under the payment approach insurance expenditure weights are on a ‘gross’ basis, based on total household spending on insurance premiums. This is in contrast to the ‘net’ basis used in the CPI, which includes only the proportion of insurance premiums that contributes to the cost of providing the insurance service (ie premiums less claims). Aggregation method The aggregation method – used to combine household expenditure patterns within each household group – uses an unweighted average of the expenditure proportions for each household. This method is known as ‘democratic weighting’. It better reflects the inflation experienced by a ‘typical’ household than does the ‘plutocratic weighting’ method used for the CPI. The CPI approach, best suited to a macroeconomic indicator, involves calculating expenditure patterns from aggregate household expenditure. This latter approach means that higher expenditure households have a greater influence over the composition of the aggregate patterns. For additional information on why we chose this method see Bentley, 2016. Equivalised expenditure/income explained Equivalisation is a technique that adjusts expenditure/income information to help compare economic standard of living across households. The basic concept is to look at expenditure/income per ‘standardised’ person – each person is standardised according to the household they live in. Equivalisation is based on the premise that larger households need relatively fewer resources per person to maintain the same standard of living as smaller households; there are economies of scale and pooling of resources within larger households. The modified OECD scale is used to define the HLPI household groups. It is a simple scale that is widely used internationally. The scale assigns a value of 1 to the first household member, 0.5 to each additional adult, and 0.3 to each child (aged under 14 years). For example, this implies that a household of two adults and one child would need 1.8 times the expenditure/income as a one-adult household to obtain the same standard of living. The table below shows the expenditure and income boundaries used to define the household groups in the 2012/13 Household Economic Survey (used to calculate the June 2014 quarter expenditure weights). The expenditure and income of each household has been equivalised to a 1-adult household. Quintile boundaries (equivalised 1-adult household) Quintile Expenditure Income Quintile 1 (low) Less than $17,943 Less than $19,892 Quintile 2 $17,943 – $25,328 $19,892 – $28,307 Quintile 3 $25,329 – $34,670 $28,308 – $41,112 Quintile 4 $34,671 – $46,137 $41,113 – $55,367 Quintile 5 (high) $46,138 + $55,368 + Source: Statistics NZ Sensitivity analysis on the choice of equivalisation scale found little difference in the household-group inflation rates using the chosen, modified OECD scale, compared with the Square Root and the Jensen scales (Bentley, 2015). en-NZ