Cost of living index wanted

By BRIAN FALLOW


A new cost of living index which would more accurately capture housing costs has been recommended by a review of the way the statisticians measure inflation.

An advisory committee chaired by National Bank chief economist Dr John McDermott found Statistics NZ's consumers price index did a good job of measuring inflation for the purposes of the Reserve Bank and, therefore, the financial markets.

The committee recommended only minor changes to the CPI, such as scrapping the seasonal adjustment of fruit and vegetables.

But it recommended it be supplemented by an annual cost of living measure more tailored to such purposes as pay negotiations or the indexation of benefits.

The main difference from the CPI would relate to housing. The CPI includes rents and the cost of building new houses but does not include changes in the prices of existing houses or mortgage interest rates.

A cost of living index would reflect the value of the goods and services consumed in a period rather than the cost of purchase.

For most items, such as a banana or a haircut, the cost and the value are the same. But for a durable item like a house it would seek to reflect the value of the shelter provided over the period concerned, for example, by estimating what it would have cost to rent the dwelling.

But because that involves an element of guesswork an alternative approach would include all the monetary outlays on an owner-occupied house, including mortgage interest and principal repayments.

The committee also recommended "spatial" indexes to reflect regional differences not only in prices but what people spend their money on.