Bob Edlin’s comments on the CPI in your August edition are incorrect. Statistics New Zealand does systematically adjust price changes to take account of improvements or reductions in the quality of commodities being priced in all cases where there are robust and cost-effective methods of doing this. These range from quite simple proportionate adjustments where the size or weight of standard unit like bottle of beer changes, through to complex “regression” techniques used with whiteware and used cars.
Bob Edlin’s point about CPI error is well known and widely researched internationally. Moreover there are more sources of CPI error than just the quality bias that he refers to, and no country would pretend that its CPI was perfect measure of change in the “true” cost of living.
The challenge for Statistics New Zealand, as for all statistical offices, is to maintain an index that people trust as measure of price change that is fit for the principal purposes for which it is used. This involves addressing all the potential sources of error, including the representativeness of the goods priced, the mix of outlets from which they are priced, the weights applied to those goods, as well as adjusting price changes for improvements or reductions in product quality. It is also important to maintain robust processes to minimise the occurrence of calculation error, publish the index to pre-determined schedule and make it available to everyone on an equal footing.
The relevance of the CPI to monetary policy is that it is recognised and trusted as the measure of inflation, and therefore sets people’s expectations. To help maintain this trust, Statistics New Zealand consults widely with users, and works to ensure key policymakers understand the conceptual and practical difficulties of measuring price change and have confidence that our CPI meets recognised standards of good practice.
Ian Ewing
Deputy Government Statistician
