Introduction
The Consumer Price Index (CPI) is a phrase that we hear a lot more regularly. But, what is it, how is it measured, and how does it impact our lives? In this post, I will address all of these questions and clarify how we can use them to make better decisions regarding our money.
What is the Consumer Price Index?
In short, the Consumer Price Index (CPI) itis a measure of the average price change over time of consumer goods and services purchased by households in Ireland. The CPI takes a weighted average of prices of selected goods and services. For example, this month's CPI release indicated that prices increased 7%, which means that if you spent €100 on goods in April 2021, that exact shopping list would cost €107. Let's explore what this means for your money, how we can use this information to make spending adjustments, and how to protect ourselves from inflation's impact.
Who is in charge of the CPI, and how is it calculated?
The CPI basket includes a wide range of goods and services, such as food and beverages, housing, clothing and footwear, transportation, health care, education, communication, and recreation. In addition, the CSO website provides detailed information on the way used to calculate the index and data on historical inflation rates.
To measure changes in the cost of living, the Central Statistics Office (CSO) collects a representative sample of prices for a fixed basket of goods and services each month. The basket currently contains 615 items, including food, housing, transportation, utilities, health care, salt and even smartphones.
Approximately 51,000 Prices are collected monthly. The field prices record the prices of identical products in their designated outlets each month. CSO staff members also collect many other costs online by telephone and written correspondence. These include airfares, motor insurance and utility bills, among many others.
How Covid Changed the CPI
The COVID-19 pandemic has had a significant impact on how the Central Statistics Office (CSO) collects price statistics. In response to the outbreak, they have adapted their data collection methods to rely more heavily on electronic sources. This includes collecting returns from retailers in electronic format, web scraping and online pricing. While some level of in-person data collection will continue to be needed, these new methods have allowed us to increase the amount of price data we can collect. As a result, they can better monitor price changes across a wide range of goods and services.
It will take a few years to bed in these new data sources and methods completely. However, as we implement this change of approach, we will be able to process more price observations and produce a more detailed analysis of consumption, giving more detail on how price changes affect Irish households. We expect that this will also include new insights into the products we buy and how buying patterns change over time. In the meantime, the CSO will continue to publish monthly inflation rates and estimates of changes in the cost of living based on the existing methods and data sources.
How up to date is the basket of goods that's being measured?
As I mentioned earlier, the CPI is the weighted total of 615 items, but how do they choose which items to include and which items to leave out? The Household Budget Survey (HBS) is the primary source of information used in updating the basket of goods and services included in the CPI.
The HBS provides a detailed profile of household expenditure, item by item. Following each HBS, the CSO reviews the basket of goods and services included in the CPI and establishes the weights used in calculating the index to reflect current expenditure patterns. The updated weights are then applied to the price changes of the relevant items to produce an estimate of inflation. Therefore, the basket of goods and services is constantly being updated to reflect changing expenditure patterns. This ensures that the CPI is an accurate measure of inflation.
The basket recalculating is long overdue.
Typically, the Household Budget Survey (HBS) is conducted every five years to provide an up-to-date profile of household expenditure. The CSO reviews the basket of goods and services included in the CPI following each HBS to ensure that the index accurately reflects current expenditure patterns.
The HBS generally provides a detailed picture of how Irish households spend their money, which is essential for ensuring that the CPI basket of goods and services is representative of typical shopping behaviour.
The most recent Household Budget Survey (HBS) was conducted in 2015/16. An updated survey was due in 2021, but it was pushed out due to the COVID-19 pandemic and is now being collected throughout 2022/23. The results of the updated HBS will be used in rebasing the CPI at the end of 2023. This means that instead of the usual five-year updates, this one will be a 7-year update.
Through the HBS, items are added to and taken from the CPI. For example, in previous surveys, we included video rentals and video players in the index. However, they are no longer part of the list, and other items like smartphones and streaming services, craft beers and avocados have been included.
What is a weighting?
The items within the CPI basket are weighted to give an accurate picture of what actual spending is like. For example, a much more significant proportion of the expenditure is spent on petrol than salt. Therefore petrol gets a much larger weight than salt in the CPI basket. These weights are changed annually using other statistics on consumer spending. The index is reviewed periodically to ensure that it remains representative of what people are buying in Ireland.
Can we compare the CPI to other countries?
The EU uses a very similar way to collect pricing data as Ireland. The EU's Harmonised Index of Consumer Prices (HICP) is a measure of inflation and is used by the European Central Bank to help guide monetary policy decisions for the EU. The HICP is calculated using the same price collection mechanism as the CPI but uses a subset of the CPI basket and different weights. The EU HICP covers all EU Member States and Iceland, Liechtenstein, and Norway. Switzerland also participates voluntarily. The HICP is released monthly and is usually available about six weeks after the reference month.
The ECB aims to maintain inflation at close to 2% per year. However, with 7% inflation calculated for Ireland in April 2022 and the eurozone at 7.5%, this is causing some concern. Many factors impact inflation, including economic growth, wages, supply chain, the ongoing war and energy prices.
How accurate is the CPI for you?
The CPI is an average for all households and does not account for how different types of families spend their money. Therefore, measuring price change for other households would not be feasible. So a single index is used as a proxy for all homes. This index is based on a 'representative' or 'basket' of goods and services consumed by households. The 'basket' is updated periodically to reflect changes in spending patterns, every generally five years with the BHS. Still, this time around, it will be seven due to delays caused by Covid.
How individual households may be affected.
Depending on income, demographic age etc., we can all be affected differently by inflation and, therefore, the CPI. For example, households that spend a larger share of their income on housing will be more sensitive to changes in housing costs, while families that spend a larger share of their income on food will be more sensitive to changes in food prices. By measuring price changes for different types of households, a more comprehensive measure of inflation captures the personal experiences of other groups of consumers.
How is the CPI used:
An accurate way to adjust wages and social welfare payments in a changing economy.
It can help when adjusting pension payments over time to cover the basics.
Governments and economists use it as a measure to see how the economy is doing, and this impacts public policy
Households can see where prices are rising the most and try to curb spending in those areas as much as possible.
The CPI is released monthly and is used by businesses, government agencies, and individuals to make inflation adjustments.
It is an important tool for policymakers, businesses, and consumers, and it provides valuable insights into changes in the cost of living. Used correctly, the CPI is quite helpful for guiding government policy, calculating pensions adjustments and giving the average person on the street an indication of how much their income is going on essential goods and services. As a general rule of thumb, the faster the CPI index rises, the higher the rate of inflation and the less bang we get for our buck.
Conclusion
So, what does this all mean for you and your pocketbook? The CPI is a measure of the average price change over time of consumer goods and services purchased by households in Ireland. This month's CPI release indicated that prices increased 7%, which means that if you spent €100 on goods in April 2021, that exact shopping list would cost €107. Prices are rising across the board, so it's essential to be aware of what impacts you the most. Try to adjust your spending where possible, and remember that even small changes can make a big difference down the line!
Comments