Domestic cost inflation in New Zealand is much higher than the
Reserve Bank would like us to know about (see Raising Interest
Rates Raises the Inflation Rate). However, the cost
of living depends on import inflation as well as domestic inflation,
as measured by the Consumers Price Index (CPI).
Figure 1 below shows what has happened to prices in New Zealand
since the early 1970s. Consumer prices doubled from 1973 to 1979,
doubled again from 1979 to 1984, and again from 1984 to 1994.
It might seem that the inflation "performance" was better
after 1984, because it took longer for prices to double. But it
is the relationship between import prices and domestic prices
that indicates performance.
From 1970 to 1984, import prices increased more rapidly than did
consumer prices. Indeed, inflation in New Zealand was generally
imported. New Zealand prices rose largely as a consequence of
increases in import costs, and, to a lesser extent, as a result
of rising export prices.
From 1984 to 1997, import prices have actually fallen,
while export prices have barely increased. Yet consumer
prices have more than doubled. That's the legacy of the
economic reforms. Domestically generated cost increases have burgeoned,
while we have depended on imports to limit the damage to our living
standards.
There are many problems with this situation. We cannot pay for
our increased imports when our exporters face higher cost increases
than foreign producers. By and large, these costs arise from our
increasingly inefficient finance and government sectors; ie the
"transaction sectors" of the economy. Government supplies
us with less in 1997, while charging more for it. The finance
and business services sector charges much more than before. Yet,
despite that, its services are in greater demand than before.
An economy full of struggling firms generates a greater demand
for financial and business services, as companies seek help to
maintain their market shares.
Another problem with this situation of diverging domestic and
imported inflation appears to be a contrast in the inflation experiences
of beneficiaries (and low income workers) compared to high income
workers. We used to have a measure of the different inflationadjusted
income experiences of each "quintile" of wage and salary
earners. Wage and salary earners were divided into five equallysized
groups, and the experience of a typical worker in each group was
traced.
These "real disposable income indexes" became an embarrassment
to the Government, because they showed how much better the top
20% were doing than the rest of the employed labour force. (By
and large, the top 20% represent suppliers in the transaction
sectors.) But these indexes never told the whole story. People
in the bottom 40% spent their earnings differently to people in
the top 40%. It would have been a very simple matter to produce
an inflation index for each of the five quintile groups, because
the expenditure patterns of each group are known from the Household
Expenditure and Income Survey (HEIS). But it has never been done.
What was done a few years ago by Statistics New Zealand, though,
was the creation of a Superannuitants Price Index (SPI), with
subdivisions for homeowners and for renters. The SPI for
renters serves as a good base for a general Beneficiaries Price
Index, or Basic Price Index (BPI).
There are some problems. The SPI is based on the spending of an
average superannuitant, whereas a BPI should reflect the expenditure
patterns of persons on an official poverty line. Furthermore,
superannuitants on average have less debt than beneficiaries and
low income "independent" families. An index that measures
the costs faced by a typical low income New Zealander should have
a significant weighting for credit services; ie for the direct
impact on the cost of living of high interest rates.
A simple BPI should focus on a simple range of goods and services
that cannot be avoided - food, shelter, clothing, public transport,
health care, education. With the exception of education - an area
of rising costs to families but not to superannuitants - the SPI
for renters covers these items.
I have adjusted the SPI for renters by taking out private transport,
air travel and tobacco/alcohol. (One reason for taking out private
transport is that the CPI and its derivatives such as the SPI
tend to focus on the price of vehicles, whereas the major cost
of private transport is depreciation on vehicles. Since the beginning
of the demise of the New Zealand automobile industry, and the
coincident increase in the supply of second hand imported vehicles,
the price of cars has come down whereas the price of motoring
has increased on account of markedly higher rates of depreciation.)
Figure 2 shows the result of my exercise. Through the 1990s,
beneficiaries have faced higher inflation on average than have
average consumers, or consumers on average incomes. (Many
more New Zealanders have incomes below the national average than
have aboveaverage incomes, thanks to the increasing skew
in the distribution of incomes.)
Following the big fall in benefits in July 1991, benefits have
been adjusted in line with the CPI. If the CPI had been an accurate
reflection of beneficiaries' inflation, then low income New Zealanders
would have simply suffered from a loss of income relative to other
groups, given that the New Zealand economy has been growing since
1992. But, given that beneficiaries' true inflation is significantly
higher than the CPI, beneficiaries have, between September 1991
and September 1997, suffered from both absolute and relative losses
of income.
Inflation faced by low income New Zealanders reflects domestic
costs rather than import prices. Low income New Zealanders consume
few imports, and a relatively high amount of housing rentals,
home operation costs (including "fuel and light" which
is running well ahead of the CPI), and health care costs. (My
BPI is not biased on account of the availability of Community
Services Cards for health care for beneficiaries. This is because
the impact of the Community Services Card is factored in for superannuitants
who rent their accommodation.)
We need much better official statistics (and better publicised
statistics) with which we can trace the economic squeeze faced
by low income New Zealanders. Even more, we need to revert to
financial regulation and systems of public sector funding more
like the old than the present. In the past, when social service
providers were not each subjected to a fiscal cap, those services
were less expensive.
On account of their gross inefficiency, the reforms have
caused a domestic cost inflation that has severely damaged the
life opportunities of many New Zealanders. New Zealanders
are less able to purchase the collective goods that their incomes
ought to afford. This is fiscal irresponsibility. The imbalances
between supply and demand are greater now than they ever were
before 1984.
{ This document is: http://www.oocities.org/Athens/Delphi/3142/krf25-bpi_spi.html
{ the above reference is to: http://www.oocities.org/Athens/Delphi/3142/krf23-cpi.html
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