Consumer Price Index

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Consumer Price Index What is it? The Consumer Price Index (CPI) can be defined as “an index of the changes in the cost of goods and services to a typical consumer, based on the costs of the same goods and services at a base period.” (CPI, 1995) It consists of a basket of goods and services that represent purchases made by households. The goods and services in the basket and their relative importance are reviewed every three years in New Zealand to ensure the basket remains up to date. Each good or service in the basket is assigned an expenditure weight that represents its relative importance in household spending patterns (Statistics NZ CPI resource, 2008). Goods and services that are of higher importance to households are given greater weights and have a greater influence on the CPI. The weight assigned determines how much impact a price movement for a particular good has on the overall CPI. For example, if households spend more on petrol than milk, a five percent increase in the price of petrol would have a greater impact that a five percent increase in the price of milk. Changes in the CPI are used to assess price changes associated with the cost of living. How is it used? The CPI can be used to show how prices that household face have changed overtime. This is the percentage change between different periods for each class, subgroup, group or the overall CPI. It can also be used to help set monetary policy (Statistics NZ CPI resource, 2008). In New Zealand, the Policy Targets Agreement between the Governor of the Reserve bank and the Minister of Finance aims to keep annual CPI movements between 1 and 3 percent. From this, the Governor either increases or decreases the official cash rate which has an impact on the mortgage interest rates households pay. Another important use of the CPI by the government is to adjust New Zealand Superannuation and

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