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What has caused inflation since 2006

This article shows where household inflation has – and hasn’t – come from in New Zealand over the 10 years from 2006 to 2016. The June 2016 quarter marked 10 years since the CPI index was published with the expression base of the June 2006 quarter (=1000).

The CPI has increased at an average annual rate of 1.9 percent over the 10 years since the rebase. This compares with average annual rates of 2.1 percent between June 1996 and June 2006, and 4.9 percent between June 1986 and June 1996.

Figure 1

Graph, CPI all groups, quarterly indexes, base: June 2006 quarter (=1000).

The groups that showed the largest increases over the 10 years to June 2016 were:

  • alcohol and tobacco (up 53 percent)
  • education (up 41 percent)
  • housing and household utilities (up 40 percent)
  • food (up 29 percent).

Figure 2

Graph, CPI – selected groups, quarterly indexes, base: June 2006 quarter (=1000).

These increases were partly offset by a decrease in communications-related prices (down 26 percent). Based on weighting, housing and household utilities have had the largest increase relative to expenditure weighting (24 percent expenditure weight), followed by food (19 percent expenditure weight).

Education prices show steady increases

Increases in primary and secondary school fees (up 58 percent), and tertiary education (up 48 percent) were partly offset by a 12.7 percent decrease in early childhood education (ECE).

Private school tuition fees have increased 62 percent for both secondary and primary schools in the 10 years since 2006. State and integrated school voluntary donations increased 57 percent for primary schools and 52 percent for secondary schools. Government introduced a 3 percent cap on annual tertiary education-fee increases in 2015, and 20 hours free ECE in 2007.

Figure 3

Graph, Education – selected classes, quarterly indexes, base: June 2006 quarter (=1000).

Home-ownership costs outpace rentals and utilities

Higher prices for the housing and household utilities group were influenced by higher council charges – local authority rates, refuse and recycling costs, and water supply charges all increased during the 10 years. The cost of property maintenance and purchase of new housing also increased.

Figure 4

Graph, Home ownership costs – selected classes, quarterly indexes, base: June 2006 quarter (=1000).

The cost of dwelling insurance has increased dramatically since 2011, due to the Canterbury earthquakes resulting in higher premiums for dwelling insurance. The dwelling insurance class had the highest overall increase at the class level in the last 10 years, increasing sharply between 2011 and 2014.

Household living-costs price indexes include mortgage interest. The cost of mortgage interest is out of scope for the CPI.

Prices for rentals for housing increased 24 percent over the 10 years to 2016, although this was outpaced by increases in electricity and contents insurance prices. Rentals for housing account for 9.2 percent of the weighting of the CPI basket. Compared with the QV house price index, between March 2012 and March 2016, house prices (including land) increased 41 percent while CPI rentals for housing increased 9.1 percent over the same period.

Figure 5

Graph, Housing-related costs – selected classes, quarterly indexes, base: June 2006 quarter (=1000).

Health services prices increase while pharmaceutical products remain steady

The health group also increased over the past 10 years, influenced by higher costs for both hospital and outpatient services such as medical and dental services. These increases were partly offset by relatively static overall movements for pharmaceutical products, despite a dip between 2007 and 2013. Implementing reduced prescription charges for people aged six years and over in September 2007, and the subsequent increase in prescription charges in March 2013, caused the dip.

The cost of health insurance has continued to increase, with higher premiums outpacing the cost of both health-related services and products since 2006.

Figure 6

Graph, Health-related costs – selected classes, quarterly indexes, base: June 2006 quarter (=1000).

Technology and competition influence downwards movements

In contrast to other classes, telecommunication, audio-visual, and computing equipment decreased in price over the past 10 years. These classes had consistent decreases, reflecting the competitive nature of their respective industries and quality adjustment due to improvements in technology and specification. Cellphone handset prices have fallen 93 percent since 2006, mostly reflecting quality improvements and increased functionality rather than nominal price change.

Figure 7

Graph, Telecommunication, audio-visual and computing equipment classes, quarterly indexes, base: June 2006 quarter (=1000).

Transport- and retail-influenced groups show less movement

While some groups have diverged greatly from the expression base since 2006, other groups have remained at a similar level over the 10 years. These include:

  • clothing and footwear
  • household contents and services
  • transport
  • recreation and culture.

Figure 8

Graph, CPI – selected groups, quarterly indexes, base: June 2006 quarter (=1000).

A number of items within these groups were influenced by a combination of:

  • greater competition
  • lower costs being passed to the consumer
  • favourable exchange rates
  • quality adjustment for improvements.

For example, lower operating costs and the presence of more carriers have influenced lower international airfares. Household contents have decreased in price through competitive retailing of furniture and home appliances. Additionally, New Zealand retailers have had to compete with increased online competition over the past 10 years – personal imports from offshore sellers have become easier, and more affordable, due to increased internet usage and favourable exchange rates.

Government has a role in price change

Some large price movements in the 10 years since 2006 have been influenced by changes to central government policy. Examples of these changes include:

  • telecommunication services (lower mobile termination fees since 2011)
  • education (early childcare 20 hours free in 2007)
  • cigarettes and tobacco (annual excise duty since 2010)
  • transport costs (lower vehicle licencing fees in 2015).

Figure 9

Graph, selected classes with government-influenced price change, quarterly indexes, base: June 2006 quarter (=1000).

We show these government changes as price change to consumers in the CPI. They are usually represented as one-off large price movements in the quarter they are implemented. An example is a 32 percent decrease to ECE fees between June 2007 and September 2007, when 20 hours free ECE was implemented.

Annual increases in excise duty for cigarettes and tobacco since January 2010 have cumulatively resulted in a large increase over the last 10 years. Between March 2010 and June 2016, the price of cigarettes increased 120 percent, compared with a 13 percent increase between June 2006 and March 2010. The average price for a packet of 25 cigarettes was $28.80 in June 2016, up from $11.95 in June 2006.

How we apply the expression base

In the past the CPI expression base has been rebased every six years to coincide with a CPI basket review. Before the current rebase in June 2006, we changed the expression base in June 1999 and June 1993. We update the base period to ensure indexes do not stray too far from the 1000 expression base.

However, historically low inflation recently, and a relatively small divergence from the 1000 expression base, means we continue to use the expression base from 2006 for the CPI. An update of the expression base is being considered for the upcoming 2017 CPI basket review.

More information

See Consumers Price Index: June 2016 quarter. The supplementary tables provide a full time series of CPI groups and subgroups. More specific data is available on Infoshare.

See the CPI visualisation tool for movements and weighting information for relative importance.

Published 6 October 2016

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