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Trimmed mean inflation excluding GST rise

This article discusses how consumers price index (CPI) analytical trend measures of price change published by Statistics NZ behave when the direct impact of the October 2010 increase in GST is removed. The measures that are the focus of this article are the trimmed mean measures, which exclude extreme price increases and decreases. These trimmed means have been calculated using the CPI lower-level indexes that were processed with GST of 12.5 percent for goods and services that are subject to GST.

The CPI rose 1.0 percent in the June 2011 quarter, and 5.3 percent in the year to the June 2011 quarter. If prices collected for the CPI had been processed with GST of 12.5 percent (for goods and services that are subject to GST), the CPI would have risen 0.9 percent in the June 2011 quarter, and 3.3 percent for the year to the June 2011 quarter. When the influence of large increases and decreases is removed, the 10 percent trimmed mean quarterly and annual rises in the CPI with GST at 12.5 percent fall to 0.8 percent and 3.1 percent, respectively.

Trend measures of price-level change

Over the long term, the CPI captures the broad pattern of price change, but can be influenced by one-off events when analysing price change over shorter timeframes. Such influences include:

  • adverse climatic conditions – affecting the prices of fresh fruit and vegetables or other food items
  • supply disturbances – for example, a supply disturbance for petrol can have a large impact on the CPI in the short term
  • price seasonality – such as international air fares and rental car hire.

To remove such influences, analytical measures of price change are calculated in an attempt to isolate the more persistent – or underlying – component of general price-level changes. Several analytical measures are constructed to give a good guide to underlying price-level change. These are a range of 'trimmed means' and a range of 'weighted percentiles' including a weighted median.

Trimmed mean measures exclude the influence of the largest increases and decreases in the CPI. This is done at the item level of about 700 goods and services in the CPI basket (eg 91 octane petrol or strawberries). The trimmed means progressively remove the influence of the largest increases and decreases. The 5 percent trimmed mean is calculated by removing the top 2.5 percent – by weight in the CPI – of the price distribution and the bottom 2.5 percent of the CPI. Trimmed means are also calculated by removing 10 percent (ie the top 5 percent and bottom 5 percent are trimmed), 15 percent, 20 percent, 25 percent, and 30 percent.

The weighted median is the movement of the item that sits right in the middle of the range of price movements in the CPI. The weighted median is the movement of the item at the 50th percentile (ie item-level indexes with half the CPI weight rose by more and half by less). Four other weighted percentile measures are also available (the 10th, 25th, 75th, and 90th weighted percentiles), primarily to highlight the distribution of price changes. Where the distribution is positively skewed, the weighted median movement will tend to lie below the CPI movement. Where the distribution of price movements is negatively skewed, the weighted median movement will tend to lie above the CPI movement.

When external events broadly affect the CPI, their impact on prices will not be removed from these analytical measures. When GST rose, this affected about 90 percent of the CPI basket of goods and services, meaning that the immediate impact of the GST rise was not removed from these analytical measures. This lessens their usefulness in measuring underlying inflationary pressures in the economy during the year-long period in which the GST rise is reflected in the CPI.

Impact of the GST rise on the CPI

The GST rate rose from 12.5 percent to 15 percent on 1 October 2010. Lifting GST to 15 percent could increase retail prices of goods and services that are subject to GST by 2.22 percent. For example, a product priced at $100 (excluding GST) would have sold for $112.50 before 1 October. With GST increased to 15 percent, that product would retail for $115 (all other things being equal), which gives an increase of 2.2 percent.

Housing rentals, school donations, life insurance, and credit services are exempt from GST. These items make up about 9 percent of the CPI. Further, some items in the CPI basket are zero-rated for GST, such as international air fares, international package holidays, and some international postage. These items made up a further 2 percent of the CPI at the September 2010 quarter. This, coupled with the 2.22 percent increase in other prices (if the rise in GST were fully reflected in retail prices), would result in an increase of about 2.0 percent in the CPI.

The rise in GST was not immediately reflected for some seasonally available goods and services in the CPI basket. The rise is reflected when prices for these items are next collected after the rise. For example, education fees were collected in the March 2011 quarter, rugby game admission prices were collected in both the March 2011 quarter (for one competition) and again in the September 2011 quarter (for another competition), and prices for winter seasonal clothing were collected in the June 2011 quarter. These items make up about 3 percent of expenditure on goods and services in the CPI. Of this expenditure, nearly half was shown in the March 2011 quarter, nearly half was shown in the June 2011 quarter, and the remainder will be shown in the September 2011 quarter.

If prices collected for the December 2010, and March and June 2011 quarters had been processed with a rate of GST of 12.5 percent (for those goods and services subject to GST), the CPI would have risen by 0.5 percent, 0.8 percent, and 0.9 percent, respectively. It would have increased 2.1 percent for the year to the December 2010 quarter, 2.6 percent for the year to the March 2011 quarter, and 3.3 percent for the year to the June 2011 quarter.

Results

The table below gives the results for the trend measures of price change, with the prices collected for the CPI reprocessed with GST at 12.5 percent.

CPI and trend measures processed with GST at 12.5 percent
Quarter CPI all groups CPI all groups processed with GST at 12.5 percent Weighted median processed with GST at 12.5 percent 10 percent trim processed with GST at 12.5 percent    30 percent trim processed with GST at 12.5 percent
Percentage change from previous quarter
Dec 2010     2.3      0.5  0.2 0.4 0.2
Mar 2011 0.8 0.8 0.3  0.8  0.5
Jun 2011 1.0 0.9 0.5 0.8 0.8
Percentage change from same quarter of previous year
Dec 2010 4.0 2.1 1.5 1.9 1.7
Mar 2011 4.5 2.6 1.7 2.3 1.9
Jun 2011 5.3 3.3 2.2 3.1  2.6 

Over the three-quarter period, the range of annual analytical measures was lower than the CPI movement, as indicated by the trimmed mean measures (which exclude extreme price increases and decreases) and the weighed median (the middle movement of the distribution of price change). This suggests that the influence on the CPI of extreme price increases is larger than the extreme price decreases.

For example, in the June 2011 quarter calculation of the annual 10 percent trim, the annual price increases that were removed from the calculation ranged from 84 percent to 18 percent, while the annual price decreases removed ranged from 27 percent to 9 percent. As the annual price increases were larger than the annual price decreases removed, the trimmed mean measure falls below the overall CPI annual movement. The annual 10 percent trimmed mean rose 3.1 percent in the year to the June 2011 quarter, compared with a 3.3 percent rise for the CPI (with prices processed at 12.5 percent GST). Moving to the 30 percent trim, the last items being trimmed rose 8 percent and fell 2 percent, resulting in the 30 percent annual trim being 2.6 percent.

Significant items that rose in price in the year to the June 2011 quarter that were removed at the annual 30th trimmed mean measure included: international airfares (particularly to Australia and the Pacific), tobacco and cigarettes, road user charges, and annual vehicle relicensing fees.

Figures 1 and 2 show the quarterly and annual movements for the CPI, the CPI adjusted by processing prices at 12.5 percent GST, and the 10 percent and 30 percent trimmed mean measures with prices processed at 12.5 percent GST.

Graph, CPI quarterly change - Dec 2010 - Jun 2011.                               Graph, CPI annual change - Dec 2010 - Jun 2011.

Tables 1 and 2, which can be downloaded in Excel format in the ‘Available files’ section of this article, show quarterly and annual movements for the full range of trims and weighted percentiles, with prices processed at 12.5 percent GST.

Back to Price Index News: October 2011

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