Thursday, March 18, 2010

Does the Reserve Bank think the Consumer Price Index is a joke?

Australia's consumer price index is amongst the worst in the developed world according to a damning critique by the Reserve Bank which has asked an inquiry to recommend an overhaul.

The Bank's submission to the regular review of the CPI, made public on its website, says at times it has been seriously misled by inflation figures "that subsequently proved not to be representative".

It wants the CPI published monthly rather than quarterly, whatever the expense, and notes that Australia and New Zealand are the only developed countries not to do so and that Australia is only G20 nation not to do so.

Countering an objection from the the Bureau of Statistics that the cost of moving to monthly figures would be "considerable" it says the cost would be "small relative to the benefits" of getting its monthly interest rate adjustments right.

It says while much of the data used in the creation of the CPI is already collected monthly, it is "not published until as much as three months later, and then only as part of a quarterly average."

"In recent years there have been a couple of instances of quarterly readings for inflation that subsequently proved not to be representative of the general trend,"... the Bank says. Monthly data would "allow earlier identification" of rogue figures.

Of particular concern to the Bank is the so-called "D&L" component of the CPI which is meant to measure the price of deposit and loan facilities. It says alone in the developed world the Australian Bureau of Statistics includes in it an indirect estimate of interest rate margins, which bizarrely is sometimes negative, "implying a negative price".

As the forth biggest component of the CPI it says the D&L has at times dramatically skewed its outcome.

"For example, the D&L rose 16 per cent over the year to September 2008, adding almost three quarters of a percentage point to CPI inflation," it says. "More recently it fell 15 per cent over 2009, subtracting three quarters of a percentage point."

Enhancing the Bank's frustration at the CPI it has found that the D&L usually moves up whenever it increases interest rates, putting further upward pressure on the CPI and adding to the apparent pressure for it to increase rates further.

It wants the D&L reassessed or "removed from the CPI, or at least the interest margins component removed".

It also wants the CPI seasonally adjusted, pointing to obvious seasonal patterns including an apparent jump in education prices at the start of each year and an apparent drop in pharmaceutical prices at the end of each year associated with the workings of the Pharmaceutical Benefits Scheme.

The Bank is also frustrated by how rarely the basket of goods measured in the CPI is updated, saying the ABS now only updates its assessment of spending patterns every six years, "significantly less frequently than other advanced economies".

The submission includes a graph showing that the official view of how much Australians spend on computing and audiovisual equipment is always seriously out of whack by the time it is adjusted.

It says if the ABS won't survey spending patterns more frequently it could at least use scanner data from shops to make adjustments as it says do other countries.

The Bureau is publishing all submissions to the inquiry on its website in order to foster what it calls "an informed, robust and consultative process".

Published in today's SMH

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. If you thought the consumer price index measured the cost of living..

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. Do you think the CPI is a joke?


Anonymous said...

CPI is out by about 100% as it does not include the highly inflated land component of real estate debt (up 300% in last decade vs CPI calculation of 50%).

So what is declared as 2.5-3% inflation year in year out is probably closer to 5-6% given sky rocketing mortgage loan amounts.

RBA could somehow factor into its interest rate mechanism the influence of land inflation it wants to address full inflation.

From ABS website:
6.24: “For the purposes of the CPI, the costs of housing should reflect only the service (or consumption) component. A common approach is to regard the cost of the land as representing the investment component and the cost of the structure as representing the consumption component. For the purposes of the CPI, the land component needs to be excluded from expenditure on housing.”

All well and good, except when one considers how much of a mortgage the ‘land component’ chews up. Paying for land consumes borrowers earnings, but is not a ‘consumption component’. Excellent.

I think I understand. It’s the banksters profit the ABS is naively or deliberately looking out for by not capturing all inflation factors. Having a stable economy is the last thing in mind.

derrida derider said...

Some good points here. But at bottom a lot of these technical decisions depend on what you think the CPI is FOR.

If its main purpose is as a guide to monetary policy setting of course you'd want to take out those factors that are determined by changes in monetary policy. But the CPI is supposed to be about the cost of living for consumers - including those costs created by changing monetary policy.

Those D&L charges are actually paid by bank customers, so from that POV they should be in there. Don't forget there are a lot of other users of the CPI than the RBA - it influences welfare payments, award wages, tax debts, etc.

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