 Most common weighted price index used to calculate inflation.  The CPI is calculated four times per year (quarterly) and results from household surveys conducted by Statistics NZ on a regular basis.  Prices for a basket of over 700 goods and services are surveyed regularly and in a number of area’s in NZ.  These goods are decided upon as to what the ‘average’ NZ household purchases  E.g. in 1990 a discman may have been included, BUT in 2009 an ipod would more likely be included instead.

 The consumer price index uses a weighting process.   Each item in the CPI has a different influence over the final score depending on its importance to families. This is determined by the fraction of their total spending on that item.  E.g Families typically spend about 17% of their income on “Food and beverages”. So the food and beverages make up about 17% of the final CPI index.

Areas are weighted according to number of people in each area

 These allow us to reduce complicated statistical changes down to one single number.  Example: CPI  Takes prices for a large ‘bundle’ of goods and calculates an index number that gives good indication of prices and whether inflation or deflation is occurring.

 Inflation is calculated from one period to the next (NOT FROM THE BASE YEAR!).  This means we need to use our percentage change formula  % change =  e.g.YearIndexInflation (1072 – 1045) × – 1072 x

 It fails to include prices for goods that are difficult to measure, e.g. second hand goods  Measures changes in retail prices as they affect the average household… BUT what is the average household?  Spending patterns are constantly changing (because our income, tastes and fashions are constantly changing, new goods coming into the market) which creates a problem with weighting various categories of goods and services

 Many goods change in design, quality and performance (with ever changing technology), e.g. the computer market- computers and laptops are constantly being improved.  It’s an acceptable internationally comparable statistic BUT other countries weightings, basket of goods, and review periods may differ.

 Producer price index: measures inflation via the costs of production. The PPI inputs are such things as electricity, fuels, materials, etc  Food price index : A measure of the rate of price change of food and food services purchased by households  Capital goods price index (CGPI): measures inflation in terms of capital goods (investment goods= used to make other goods and services) e.g. office and accounting machinery, ovens, vehicles, etc.