Is the CPI outdated?

[josko]

Hi all,

Prompted by Mark B, I thought I would start this thread on the use of The Consumer Price Index and it’s measure of inflation.

Yesterday’s RBA Meeting left rates on hold...did any of us think they would go any other way?:

The Reserve Bank of Australia is trying to balance rising inflation - above its target zone - driven by the mining boom against a downturn in the broader economy that has seen retail sales go into a tailspin and a massive drop in business confidence.

http://www.rba.gov.au/media-releases/2011/mr-11-16.html


With CPI used to determine inflation, I wonder whether some of the measures can still apply.
The Australian Consumer Price Index: ww.finance.gov.au

2. The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items bought by Australian households. Now imagine the basket is purchased each quarter. As prices change from one quarter to the next, so too will the total price of the basket. The CPI is simply a measure of the changes in the price of this fixed basket as the prices of items in it change.

3. The total basket is divided into 11 major groups, each representing a specific set of commodities. The groups are food, alcohol and tobacco, clothing and footwear, housing, household contents and services, health, transportation, communication, recreation, education and financial and insurance services.

Electricity:

When prices are driven up increasingly due to renewable energy policy and only today:
When prices are driven up by the need for infrastructure, especially in NSW.

The CO2 tax is going to increase prices again, although I expect the RBA will take that into account…but by how much?

http://news.ninemsn.com.au/national/1028811/electricity-prices-to-rise-by-up-to-64

Electricity bills in NSW will soar by up to a total of 64 per cent over the next three years, with the federal government's proposed carbon pollution reduction scheme (CPRS) and rising network infrastructure costs largely to blame.

In the big picture for me, electricity prices WILL soar as the Green shackles that have been placed on us, try to push it out of the market. We NEED electricity.

Basket of Goods: I find the use of a basket of goods to measure CPI to be dubious. Is my NO FRILLS Franklin’s milk in that basket? Is the most common BRAND used, or just the most common PRODUCT? Big question, if anyone knows please enlighten me.

Health services are rising due to the NEED for them and lack of competition…not to mention lack of Government funding. NOT because Australian’s can afford it.

Health Fund costs increase because we currently have an aging population that is putting more and more stress on our health services. More claims are being made on Health Services. Whether a result of the baby bonus and bigger families…it’s debatable. For higher income earners, a higher Medicare Levy applies if you are not in a Private Health Fund. For anyone else, the longer you wait, the more expensive it is.

Tobacco? Seriously…isn’t it time we took tobacco completely out of the equation?

In 2007 only 18% of Australian men were smokers.
In 2007 only 15% of women were smokers.
I wouldn’t mind betting that figure has dropped again by at least half a percent.
So why in the world are we using tobacco as a gauge to measure in CPI?

The price of anything will generally rise if there is a demand and a lack of competition.

I apologise for the long thread, I hope a few of you get the chance to read through. I could write more...there is so much to say on this topic, especially on the use of Interest Rates to curb Inflation.

I personally, feel the CPI needs an overhaul, but then...that's just me.

Regards JO

 

[Aaron Sice]

you're entirely right, but until governemnt see the light, debating it's effect and changes possible is pointless.

 

[toohard]

The problem is that you need to have a consistent measurement of these things over time to accurately measure change.

I'd suggest you read the following for more information on the CPI:
http://www.abs.gov.au/AUSSTATS/[email protected]?opendocument

The changes you're suggesting are more to do with quality of life aspects, not the cost of the same basket of goods and services.

 

[Chomp]

Doesn't the government need something that they can fudge, so they can sneak inflation and other things through the door?

Heaven forbid if the cpi made sense and was easy to understand, if it was people / government agency's might actually be held accountable for their actions?



Chomp

 

[Jonril]

In my opinion and to give a short answer is yes CPI is outdated/irrelevant. ... I've changed my opinion it is not irrelevant. I was wrong global decision makers use CPI to qualify their market manipulations. If anything it just adds to the distortions to the pseudo-free markets.

/start rant

The question should be is a better than nothing measurements good enough?
(Let's not pick on just one arbitrary statistic) In the context of trying to "measure" or "Analyse" pseudo-free markets.

It takes the level of ignorance that can only come from professional economists, politicians and other empty suits to believe dynamic and ever changing markets and economic events can be aggregated/estimated/measured in nice neat periodic statistics in the hope of getting meaningful results that can help with future decisions.

/end rant

 

[dan c]

Basket of Goods: I find the use of a basket of goods to measure CPI to be dubious. Is my NO FRILLS Franklin’s milk in that basket? Is the most common BRAND used, or just the most common PRODUCT? Big question, if anyone knows please enlighten me.

The other issue with the basket of goods is that it is the same basket of goods all the time. Where as in the real world, if bananas go to $12kg, I ain't buying bananas!

Because these bananas are still in the 'basket of goods' it affects inflation disproportionately to the average supermarket shop.

 

[StefanA]

The ABS did their 16th CPI review earlier this year.
I think they realize it is far from perfect, but not as imperfect as many of us believe.

Personally, I think it is time to use broader and more pertinent criteria to determine credit growth rate, but that will require an economically literate govt and opposition.

 

[MarkB]

...taking a back step...

 

[StefanA]

The best you can hope to argue is that an alternative methodology ought to be used.

like one that doesn't lead to rate holds or rises when
- a storm takes out banana crops.
- when the price of oil goes up, not due to higher domestic demand. I am not aware of other OECD nations that have put up interest rates in the last few years in part due to higher fuel prices.
- interest rate determined bank fees go up with rates.

these methodologies obviously need to have their fine detail looked at more carefully.

 

[josko]

In my opinion and to give a short answer is yes CPI is outdated/irrelevant. ... I've changed my opinion it is not irrelevant. I was wrong global decision makers use CPI to qualify their market manipulations. If anything it just adds to the distortions to the pseudo-free markets.

/start rant

The question should be is a better than nothing measurements good enough?
(Let's not pick on just one arbitrary statistic) In the context of trying to "measure" or "Analyse" pseudo-free markets.

It takes the level of ignorance that can only come from professional economists, politicians and other empty suits to believe dynamic and ever changing markets and economic events can be aggregated/estimated/measured in nice neat periodic statistics in the hope of getting meaningful results that can help with future decisions.

/end rant

HI jonril,

You are right, I have no answer as to an alternative, but SURELY Mark B, tobacco at least is completely irrelevant due to the declining percentage of the population that still smokes, not to mention Government policy re packaging etc.

Mark B,

Who's running what line? You suggested I open this thread.

You can stop lecturing qualifications. I don't profess to be an economist. Merely a tax payer as a Small Business Owner that would like to see the text books written as gospel, that teach economic graduates- updated to reflect modern times...not the 60's.

I would assume items like Bananas would be taken out of the basket as the data is collected on the quarter?

Regards JO

 

[MarkB]

Josko

I've deleted my earlier post so feel free to debate / discuss / denigrate the ABS's calculation of CPI to your heart's content.

You suggested I open this thread.

No, I did not suggest you open this thread.

Originally Posted by josko
I just think the system they use to measure the growth in the economy is outdated, or simply does not apply to what we are experiencing in Australia atm.

Originally Posted by Mark_B
What do you mean by that Jo? (if you're inclined to start a topic in the economics section I am sure it will generate replies)

Growth is measured by GDP (usually "real GDP per capita"). So, no, I did not suggest you open this thread on CPI. I expected you to open a thread on GDP.

But you weren't to know that.

 

[locko24]

Great thread Jo. (Though currently at risk of being de-railed)

I don't as much as i'd like about economics, but it seems to me, the reserve seems to be doing a reasonable job? I'm sure they could be doing it better, but Australia is in one of the best positions out of anyone right now!

 

[StefanA]

The CPI conspiracy can be either up or down, which makes it more difficult to pick the conspiracy.

When the RBA was raising rates post GFC, the smashed banana crop effected the CPI food group disproportionately in the eyes of many. When bananas came down to normal prices, the movement didn't impact the food group.

I bet my last banana if the banana crop was destroyed during 2Q11, CPI would not have reflected it if that price pushed GDP under 0%.

Can you imagine the headlines in the rest of the world
"Banana Republic pushed into official recession due to a smashed crop"