Friday, 7 July 2017

Low low prices

TV prices are so low that StatsNZ has to rebase the CPI. They normalise things in the base year to have an index figure of 1000. So the price of TVs and of cell phones in 2006 was 1000. Cell phones have dropped to 66; TVs have dropped to 60. Why? Quality adjustment.

The TV that cost thousands in the 2000s now costs maybe a couple hundred. Sure, you can still spend $5000 on a TV. But the TV you'd have spent $3000 on in 2006 is a hundred-dollar model now.
The CPI rebase
This section explains the reasons for the upcoming rebase of the CPI and FPI indexes and when it will be applied. For those of you interested in quality adjustment, or who use the index numbers in your models – read on.

We have been reviewing and reweighting the CPI basket of goods and services over the last six months. Part of the review also involves determining whether there is a need to rebase the indexes. Low inflation has led to relatively  small differences from the expression base of 1000 in the past decade, so we have kept the 2006 base period. However, due to increasing quality in some areas, we have been reporting falling prices in these areas of the index and some are now approaching zero. To adjust for this, we need to reset all of the CPI indexes back to 1000.

Technological advancements affect CPI index numbers
An important part of the CPI review is to ensure we account for improvements in technology. As it improves things get better, faster, flashier, and cheaper. The prices of mobile phones, cameras, and videos, for example, have fallen steadily over the past decade. The average price of a flat panel TV in 2006 was a staggering $3,382. If that same TV was still available today it would likely cost around $200. Similarly, a digital camera bought in 2006 would have cost about $500, now you don’t even have to buy one, they’re built in to your mobile phone and they have better specs. In the day of the ‘brick’, circa 1983, the luxury of being able to call someone while out and about would have cost roughly US$3,995 (see 40 years of the mobile phone: Top 20 facts). By 2006 the average price of a mobile phone was $249; this phone in today’s market would slip into our pocket for a mere $16.33.

When consumers get a better quality product or one with more features for the same price, this counts as a price drop in the CPI. We fix the quality of these types of items in the CPI so that we can price the same item through time.

Figure 1 shows the indexes for TVs and mobile phones for 2006–17.Figure 2 shows the indexes for the recreation and culture subgroup for the period 2006–17.Keep your eyes peeled for the updated CPI basket in January We update the CPI basket every three years, with additions and removals reflecting changes to consumer spending patterns. For example, DVD players were state of the art at the turn of the century and were added to the basket in 2002, but have been replaced by computers in the ‘cloud’ and were removed from the basket in 2008. Video-cassette recorders nearly held on that long and were only removed in 2006, signalling the end of an era of heading to the video shop on a Friday night. Mobile phones were added to the basket in 2002 and because they are still popular, will likely be there for a long time.

New CPI base period Due to all these technological advances, some of our indexes are now almost zero. From 2006, price falls recorded in the CPI for cellphones and accessories have moved the index for this item from 1000 to 66. The index for TVs is now at 60. Because these indexes are so close to zero we are losing accuracy in the CPI.

To adjust for these large differences, we will rebase the CPI by resetting all the indexes to a base period of June 2017 = 1000.
HT:  Newsroom Pro's 8 things at 8am

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