HLPIs Data Collection 2020

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 region weights which 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 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. 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. Household living-costs price indexes review: 2020 includes the expenditure and income boundaries used to define the household groups in the 2009/10 - 2018/19 Household Economic Surveys. The expenditure and income of each household has been equivalised to a 1-adult household. 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. Sampling Procedure Choosing expenditure or income quintiles Household expenditure and income from the Household Economic Survey, used to define the household-groups, reflects the annual expenditure and income during the survey reference period. In a given year, a household may have higher or lower expenditure/income than their typical amount over a longer time span. International studies suggest total household expenditure may be a better way to classify households with lower economic standard of living than using household income – if the ultimate aim of the classification is to proxy economic standard of living. Total expenditure may be preferable because households may fund some of their expenditure by decreasing their assets or increasing their liabilities. Income quintile HLPIs can be used for consistency with other income studies. We use disposable (or net) income – that is, income available after income tax. This represents what is available to spend on consumption (or for savings). Expenditure patterns The expenditure weights, which we use to aggregate price change, reflect the household-group specific expenditure patterns. The largest differences in expenditure patterns between household groups are for housing and interest payments. Greater precision in more aggregated data The expenditure patterns use the expenditure and demographic information from the Household Economic Survey. The 2018/19 HES was filled out by a sample of about 3,900 households. As this is a sample survey, the estimates are subject to sampling variability. An earlier feasibility study found that, over the study period 2008-12, differences in expenditure patterns resulted in statistically significant differences in inflation for some household-groups – compared with all households. That is, the differences were larger than the sampling noise. We also received customer feedback that the patterns look intuitively sensible and are of sufficient quality to make ongoing publication desirable. Lower-level expenditure patterns will be more volatile, as the sampling error will be greater. There is a smaller chance that the surveyed households have reported expenditure on a more narrowly defined category within the survey reporting window. For example, the expenditure weight on subgroup 11.6 (other miscellaneous services) is volatile over three weight reference periods (2008, 2011, 2014). These changes were influenced by a decrease in expenditure for the class 11.6.03 (real estate fees) between 2008 and 2011. We see the decrease in the weights for all households, but it is more acute for some household groups. In part, this is likely to reflect sampling volatility since expenditure on real estate fees will be a large but irregular amount. General information Review of the HLPIs Reviews of the HLPIs are undertaken every three years as part of the review of the CPI. See Household living-costs price indexes review: 2020 for more information. The review reselected the CPI basket and updated the relative importance of the basket items in each CPI and HLPI group. As a part of the 2020 review we are no longer weighting the HLPIs according to the types of stores used (for example, supermarkets) by each household group. Instead we are applying the same store-type weight for all household groups. Analysis of the HLPI series showed there was no discernible difference between the HLPI series calculated with and without store-type weights. Impacts of COVID-19 on the 2020 CPI and HLPI re-weights As noted in Impacts of COVID-19 on the 2020 CPI re-weight we intend adjust the weights for domestic and international airfares and overseas accommodation cost pre-paid in New Zealand. This means that the relative weight of all other CPI basket items will scale in association with the annual reweight of these three items and this will flow through to the HLPIs. We aim to keep an eye on shifting expenditure patterns for other expenditure items over the next three years, but would only consider changing weights for other items where there is a clear-cut case for doing so. This would be signalled well in advance of any change. Timing of published data We publish the HLPIs around 5 working days after the CPI after the reference quarter. For more information on the review, please contact: Fiona Smillie or James Griffin 04 931 4600 [email protected] en-NZ