Story: Prices and inflation

Page 4. Changes in relative prices

All images & media in this story

In the early 2000s inflation was generally low, but overall figures hid some substantial changes in relative prices. The prices of cars, clothing, computers and telephone services rose much less relative to the prices of food, household energy and local government property rates, according to New Zealand’s consumer price index (CPI).

Although new car prices rose between 1999 and 2008, the CPI showed they fell 7.2%, because, like all price indices, the CPI adjusts prices for quality changes – buyers got more for their money in the form of improved fuel efficiency, safety features such as airbags and anti-lock brakes, and air conditioning.

Tradable and non-tradable items

Economists often classify goods and services as tradable or non-tradable items. In broad terms goods and services that are internationally traded in mostly competitive markets (like cars) are ‘tradable’, and those that are not (like New Zealand electricity) are ‘non-tradable’. Non-tradable goods and services tend to be dominated by local suppliers with substantial market power. They are not restrained from raising their prices by international competition.

Between 2000 and 2002 price increases for tradable goods were greater than those for non-tradable goods. But on average the price of tradable goods and services rose by less than the price of non-tradable goods and services in the early 2000s. Between 1988 and 2008 the price of non-tradable goods rose by 115%, compared to only 32% for the price of tradable goods.

Producers’ prices

The CPI is the main measure of price inflation, but it is specifically designed to relate to a ‘basket’ of goods and services consumed by households. Other measures of price inflation include:

  • the producers price index (PPI) for inputs, which measures the cost of inputs of raw materials, energy and other ‘intermediate’ inputs purchased by businesses (but not the cost of the ‘primary’ inputs of land, labour and capital)
  • the PPI for outputs, which measures the price of goods and services produced by businesses.

In New Zealand the PPI for inputs and the PPI for outputs have tended to move in parallel. But between 1988 and 2008 the PPI for outputs rose by 69.1%, whereas the PPI for inputs rose by 76.1%.

How to cite this page:

Adolf Stroombergen, 'Prices and inflation - Changes in relative prices', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/prices-and-inflation/page-4 (accessed 21 July 2019)

Story by Adolf Stroombergen, published 11 Mar 2010