Story: Prices and inflation

Page 1. Prices and the consumer price index

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Price changes can be measured either generally, or relative to other prices. Price inflation or deflation is a widespread increase or decrease in prices.

A rise or fall in petrol prices due to an increase or disruption in supply is a relative price change, and does not of itself constitute inflation. But if an increase in the price of petrol leads to increases in freight costs, then in turn to higher prices for other goods and services, then to higher wage rates, and then still higher prices for goods and services, general price inflation has taken hold. This happened in New Zealand after the oil shocks of the 1970s.

Throughout the 20th century and in the early 2000s inflation was more common than deflation in New Zealand. But in the 19th century and during the depression of the 1930s the general level of prices fell.

Relative price changes

Changes in relative prices alter the price of one good relative to others. Such changes are caused by a wide range of factors, including disruptions to supply, shifts in consumer preferences and changes in productivity.

Since the Second World War changes in prices in New Zealand have usually seen prices rising, some more than others, rather than a mixture of price rises and price falls.

Economists see the price of a good or service as an opportunity cost – if people purchase one product, they forgo another one.

Consumer price index

In New Zealand the most important measure of rises in general prices (inflation), or falls in prices (deflation) is the consumer price index (CPI). The CPI measures the changes in the price of goods and services purchased by households.

Statistics New Zealand calculates the CPI by measuring the changing cost of a ‘basket’ of goods and services bought by a typical household. Weightings are attached to the price of each good. Goods that are bought frequently or in large quantities (such as electricity) have greater weight than goods bought infrequently (such as television sets).

Different types of households are affected by changes in price in different ways – for example changes in the price of baby food are not directly relevant to a household of pensioners. The CPI relates to all households collectively, rather than to any particular type of household.

Other price indices are also used in New Zealand. Instead of measuring price inflation faced by households, some measure inflation faced, for example, by farmers, exporters or hospitals. However the CPI has been recorded since 1949, and in 2009 was still the most widely reported measure of price changes.

How to cite this page:

Adolf Stroombergen, 'Prices and inflation - Prices and the consumer price index', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/prices-and-inflation/page-1 (accessed 20 October 2019)

Story by Adolf Stroombergen, published 11 Mar 2010