CTU Economic Bulletin No. 49

June, 2004

Comment

How accurate is the Consumer Price Index and how useful is it as a cost of living measure? The (all groups) CPI is generally recognised as the principal measure of inflation. It is not however the only inflation measure as there are other price indices such as the capital goods index. Also the GDP deflator is more of an economy-wide measure of inflation. There are also many analytical series which accompany the CPI and include or exclude various items. But there is no doubt that the CPI is the standard measure and is used as a point of reference in wage negotiations as well as being applied to various benefit increases. A CPI Revision Advisory Committee (including the CTU) met recently to "investigate, review and form recommendations concerning the general nature of the CPI, while taking account of the actual, potential and appropriate uses of the index".

The recommendations are not finalised. But among the issues discussed were several of interest to unions. For example, should Statistics NZ produce 'spatial' comparisons for the cost of living in different cities and regions? Auckland compared with Christchurch etc. Whether it is desirable for workers and unions to base pay claims on such regional variations is another matter - but at least some robust information would be available if such a recommendation was made and accepted by the Government. Another topic was whether or not there needed to be an index that was more of a cost of living measure rather than an inflation index showing price changes. This was recommended by the last Revision Advisory Committee (1997) but was not implemented. A cost of living measure would need to include a better measure of housing (shelter) costs than in the CPI (which includes the cost of new housing), and perhaps also measure different spending patterns of low-income households. There were many other technical issues discussed and when the recommendations have been finalised they will be sent to the Minister, and made publicly available at some stage. Any changes would apply from 2006.

The CPI measures inflation in the goods and services purchased by resident private households. It excludes interest rates. One reason for this is that the Reserve Bank uses interest rates to control inflation so including interest rates in the CPI can contradict the intent of monetary policy. But another reason is a view that paying interest is not actually a purchase or acquisition so should not be in the CPI.

The point of all this - if you are not already bored to tears - is that it is sometimes important to remember what the CPI does, and does not, measure. It has limitations as a cost of living measure. Another issue is whether the current weighting of expenditure categories accurately reflect your members' spending patterns. For instance, the weighting for food is just over 17% which could be a low weighting for many low-income households. This means that when food prices are high, the effect of this on low income families is not captured accurately in the all-groups CPI.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.4% in the March 2004 quarter and were up by 1.5% annually. The next CPI increase will be announced on 15th July. Food prices rose by 0.5% in the May 2004 year. Unemployment is at 4.3%. The minimum wage is $9.00 for those aged 18 years and over and $7.20 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey for March 2004 were up annually by 3.1% in the private sector and 3.9% in the public sector. The Labour Cost Index (for March 2004) showed private sector wages up 2.1% for the year, and public sector up by 2.7%. The key statistic for unions to note probably is that the LCI shows that for those firms where there were wage increases in the last measured quarter, the average rate of increase was 3.7% and the median increase was 3%. Economic activity (GDP) increased by 2.3% in the March 2004 quarter and 3.6% for the March 2004 year. The official cash rate set by the Reserve Bank is 5.75%.

GDP

Economic activity grew by 2.3% in the March 2004 quarter which was much higher than predicted and up from 0.7% in the December 2003 quarter. GDP growth from March 2003 was 5% with the annual growth for the March 2004 year at 3.6%. This is lower than the March 2003 year which was 4.4%. In this quarter, exports were up by 3.4%, consumer spending by 2.9% and residential investment rose by 9.8%. Business investment rose by 4.1%. Manufacturing was up by 3.8% and construction by 9.1%. Real gross national disposable income increased by 5.7% in the March 2004 year.

Employment

Job advertisements increased 1% in May and are up by 13% from May 2003. The Government has noted that there were 45,578 young people between the ages of 18 and 24 receiving unemployment benefits in May 1999. By May this year the number had dropped by 61% - to 17,527 young people. However, the number on the sickness benefit has increased by 30% since 2000, from 4236 to 5524. And the number of young people on the invalids benefit, considered to be permanently unable to work, has increased 27%, from 4782 to 6088. Meanwhile, Greg Thompson, General Manager NZ of Hudson Global Resources & Human Capital Solutions said on 2nd June that "Employers need to work hard to attract quality talent; however they must also focus on retaining existing talent within the business. We receive feedback from employees that they want regular performance reviews, career planning advice and support, as well as a work-life balance. Unfortunately, initiatives in these areas either dont happen or are in their infancy in New Zealand and its an area where improvement is needed. Accepted industry figures show that losing a staff member has the equivalent cost of up to four times their salary. Quite simply, it pays to invest in employees. Not only does it develop their skills and careers and boost retention levels, it has a positive impact on the bottom line".

Interest Rates

Interest rates (the official cash rate) increased to 5.75% on 11th June and many predict a lift to 6% on 29th July. Westpac Bank said that "we expect this year's hikes to be next year's cuts". Athough monetary policy is about second-guessing the economy in a year or so to decide whether inflation will self-correct or needs higher interest rates to slow the economy, the Reserve Bank will no doubt consider the 2.3% growth in March quarter GDP a sign that the economy is not really slowing much at all at this stage. In addition, the next annual CPI figure is bound to increase from 1.5% on 15th July as a zero quarter drops out of the rolling annual average, meaning that anything over 0.5% lifts CPI above 2%. The Reserve Bank is picking CPI to go above 3% during 2005. The worry is that as the economy slows next year, higher interest rates will reduce growth even further affecting jobs in the export sector, increase the cost of borrowing for business investment, and make life really tough for those who stretched themselves to buy a new house and are sitting on large mortgages in an environment where wages are increasing by 2-3% and house prices went up by 20% last year.

Family Income and Employment Survey

A new survey that asks questions such as 'do people with low incomes continue to have low incomes?" has had its first release. It is a longitudinal survey which means the same group are interviewed (in this case every year for 8 years). The first round took place between October 2002 and September 2003 and shows that 85% of those on low incomes stayed on low incomes over the year, that women were more likely to be low paid, the top 20% of families had incomes above $90,100 and the bottom 20% had incomes below $26,000, and that 33% of P?keha, 51% of M?ori, and 56% of Pacific families had incomes below $43,500.

Trade

The current account balance (the combined balance on goods, services, investment etc) stands at 4.2% of GDP. As usual the main culprit is the huge deficit on investment ($6.48 billion for the year) as a result of repatriation of profits, capital repayments and so forth due to high levels of overseas ownership of New Zealand firms. However, the current account balance (a deficit of $5.7 billion) is lower than predicted. The terms of trade for the March 2004 quarter improved by 2.1% (up 6.2% for the year) because although export prices fell by 1.6% (the spike in the NZ dollar more than offset higher foreign currency prices for NZ exports), there was a 3.6% decline in import prices. The May 2004 trade figures were higher than anticipated with a surge in exports and weaker imports mainly due to lower oil figures. Exporters are benefiting from volume growth, higher commodity prices and an easing in the NZ dollar exchange rate. Meanwhile, an analysis of exports for the March 2003 year shows that tourism earnings at almost $8 billion a year topped dairy as the largest export earner. Tourism was at 18% compared with dairy at 14% of export returns.

Housing

Even once the effects of inflation are removed, house prices are 30% above 1997. Median house prices are now 4 times the average household income compared with 3 times for the 1990s. Average house prices are 6.5 times the average wage compared with 4.5 times for most of the last 30 years. Average housing debt has climbed to 110% of annual household income. Median house prices are at $248,000. The Auckland median is $339,000. Although the trend for building consents is slowing, for the year ended May 2004, the total value of consents for all buildings was $9,854 million, which was an increase of $1,699 million (21%) compared with the year ended May 2003.

Company Profits

Company profits have showed a healthy improvement in recent years. For example, returns on equity and assets were up by a third in 2002 (according to Statistics NZ most recent Annual Enterprise Survey) and operating profit per full-time employee rose by a massive 40%.

Migration

In the year ended May 2004, there was a net permanent and long-term migration gain of 24,000. This is 44% lower than the net inflow of 42,500 people in the previous May year. This resulted from 85,200 arrivals (down 12,800), and 61,200 departures (up 5,700) in the May 2004 year. In the year ended May 2004, there was a net permanent and long-term inflow of 9,700 from the United Kingdom, up 20% on the May 2003 year figure (8,000). There was also a net inflow from China of 6,100, down from a net inflow of 15,200 in the May 2003 year. Overall, net inflow from Asia has reduced considerably, from 31,800 in the May 2003 year, to 15,400 in the May 2004 year. Conversely, there was a net outflow to Australia of 11,900 in the May 2004 year.

Paid Parental Leave

From 1st July, payments increase from $334 to a maximum of $346 per week.

Retail Sales

Sales fell 0.3% in April. The annual increase was 8.2%. The BNZ noted that "smoothed over the past three months we find retail spending running about 7% ahead of a year earlier - a rate of growth reflective of a still strong domestic economy buoyed by a firm labour market, strong incomes growth, and higher housing wealth and construction. Given rising interest rates, easing net inward migration, and growing talk of falling house prices we expect the underlying rate of retail spending growth to ease toward 5% over the coming year".

Government Finances

Financial Statements for the 10 months ending 30 April 2004 showed an operating surplus of $7.2 billion, gross debt at 26.8% of GDP and net debt at 11% of GDP. The Government expects the surplus to reduce to $6 billion by the end of June as indicated in the Budget.

Dairy Payout Increases

Fonterra has lifted its forecast payout for the 2003/04 season to $4.23 per kg/milksolids and raised its forecast payout for the 2004/05 season from $3.50 per kg/milksolids to $3.85. This adds nearly $32,000 to the annual income of the average dairy farmer.

Seafood Centre

The Government has contributed $1.5 million to the Neslon Marlborough Seafood Centre of Excellence. This project has been supported by the Nelson-Marlborough Seafood Cluster which includes the CTU.

For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz