Tuesday, December 07, 2010

The CPI is broken. Give us money and we'll fix it

The Bureau of Statistics has acknowledged big faults in the way it prepares Australia's most watched economic statistic, but says it won't fix them until it gets more money.

Our consumer price index stands alone among the those of leading nations in being prepared quarterly rather than monthly, forcing the Reserve Bank board to fly blind at most of its monthly inflation-targeting meetings.

The Bank believes it has made several mistakes in setting interest rates as a result.

Because much of the information is collected monthly it is up to three months old by the time it is averaged and presented to the Bank as a quarterly figure.

Announcing the outcome of a year-long review yesterday the Bureau reported overwhelming support for a monthly CPI particularly from "organisations with an interest in economic measurement of the financial sector".

But it said it would only produce one if received an extra $6 million to set it up... and then a further $15 million per year to produce it. Even then it wouldn't see the light of day for two to three years because of the need to hire staff, set up computer systems and test results.

The Bureau updates the weights of goods and services in the CPI only once every 6 years - less often than the international standard. As a result the index increasingly exaggerates inflation as the update approaches by giving too much weight to the quickly-rising prices of products consumers have stitched away from.

The review finds the overweighting overstates inflation by around 0.2 percentage points per year, incidentally pushing up by "several hundreds of millions of dollars" the cost of Commonwealth payments linked to the CPI.

It is prepared to update the weights every 4 years, but wants an extra $3.5 million per year to do it.

The uncompromising tone has been a hallmark of Australian Statistician Brian Pink since he arrived in the job in 2007 first telling staff they would no longer be expected to do more with less and then cutting or suspending a number of expensive surveys.

A spokesman for Treasurer Wayne Swan seemed to rebuff Mr Pink yesterday saying "decisions about the ABS work program and priorities are ultimately a matter for the ABS," but adding "any consideration of funding will be considered through the regular budget processes".

The Reserve Bank scored a smaller but important win the meantime, having the ABS agree to remove from the headline CPI an erratic subcomponent of the Deposit and Loan Facilities Index. An attempt to measure bank margins, the "price" is sometimes negative and bounced around in the global financial crisis. It will be still be calculated and reported as part of a separate index but will not be returned to the new index until it is improved.

Shadow Treasurer Joe Hockey expressed "alarm" at the change saying he wanted the ABS to be given the resources to measure bank margins properly and return them to the CPI.

The ABS also agreed to produce a seasonally-adjusted CPI and a CPI excluding food and energy prices from late 2011.

It had little joy for critics of the "quality adjustment" process it uses to push down the recorded price rises of cars and computing equipment saying it would "improve the transparency" of its documentation but would not produce a separate index excluding the adjustment.

Published in today's SMH and Age

Related Posts

. Wednesday column: So you think you trust the Consumer Price Index?

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

. The living cost index that won't index living costs