Chapter 1: What is the main topic discussed in this episode?
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Chapter 2: What is the Consumer Price Index and why is it important?
Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
hey team hope you're all well i've had a lot of questions lately about inflation and not just where is it going why does that matter what might it mean for interest rates but also how do we even measure it what is the consumer price index and can we trust the figures because to us they feel like they're maybe just underestimating what we're really seeing in terms of cost increases so
Let's dive into that and let's try and address that topic.
Now, inflation is always a hot topic in financial markets and it's even more prominent at the moment because you've got fuel prices that are pushing inflation higher and that's expected to gather momentum. over the next quarter or two. There is also a very healthy cynicism about those official figures.
And a lot of people, for as long as I can remember, have argued to me and elsewhere that their own cost of living has increased by more than those official figures would suggest. So in New Zealand, the key inflation measure we have is the Consumer's Price Index, the CPI.
and that is calculated by stats nz so what it does or what it's designed to do is it measures changes in the cost of living that households are facing and it does that by tracking the prices of individual items that make up a representative basket of goods and services and that is the key thing that is why it's different for everyone you've got this representative basket of goods and services
and it's a bit of a one-size-fits-all it's not going to be perfect for everyone because our spending habits are all a little bit different but anyway this basket right now includes almost 600 different items 598 items to be precise so every quarter stats nz goes out there it gets on the phones and it collects about 100 000 prices Visiting supermarkets, visiting shops, that sort of thing.
Sending out surveys to businesses, looking at websites, getting evidence of where current prices are at. And they review what's in that basket every few years to ensure that it's still relevant because our spending patterns change.
new products come about that didn't exist before and old products become obsolete so it's actually really interesting you can go on their website and dig through all the previous data but looking back into the adjustments to that cpi basket over the decades is really fascinating actually and it highlights some of the consumer trends that we've seen come and go so
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Chapter 3: How is inflation currently affecting consumers' cost of living?
So look at things like cars, furniture, household appliances, AV equipment. those items have either fallen in value, they've got cheaper, or they've moved sideways, whereas many of life's necessities have moved sharply higher over that period. So over those three years, inescapable expenses like rates, insurance, and household energy costs, they're up 25% to 35%.
groceries and meat they're up double digits so i guess the point is segments of society that find themselves spending a much greater proportion of their budget on those necessities of life they've been hit much harder than the others because if you're wealthy then you can buy some furniture you can buy a car you can buy some av equipment some of those things have actually got cheaper so you're actually buying some products that have gone down in price if you're not wealthy
if every last dollar goes on those things that you need to pay for, like your insurance, your household energy costs, your rates, your rent, actually rent's gone down a little bit lately, but food, those sorts of things, the things we have to buy, if all your money goes on those things, you have probably faced inflation that is higher than what those statistics have told you it was.
3.1% at the moment, but a lot of people out there probably sitting there thinking, well, I don't know about you, but my living costs have definitely gone up more than 3.1% over the last 12 months, so that's really understandable. StatsNZ knows this, and it actually releases what it calls a Household Living Cost Price Index, and that attempts to estimate the change in cost of living
for some of the different groups within our society so the higher income groups in that study have seen a below average increase in living costs most likely because of their ability to purchase some of the more discretionary products which have become more affordable and in contrast
the lowest income group, that group has faced a higher increase in the cost of living, as have beneficiaries, as have superannuitants, as have Māori. So in recent years, the crux of it is that rising prices have been the most impactful for those groups least able to avoid them or afford them. Now the annual inflation rate right now is sitting at 3.1%.
The next update will cover the June 2026 quarter, that's the one we're in right now, and it is June mid-year, late July I think it is. Now that is where this oil price spike will show up more completely. It hasn't quite shown up yet in the figures we've seen so far, but it will in this coming quarter and the one after that.
So inflation is likely to start with a 4, might be 4.2, might be 4.5, might be higher. We'll just have to wait and see. But even at 4%, that would be double the midpoint of the Reserve Bank's 1% to 3% target range. They are targeting 1% to 3%, and the midpoint of that is obviously 2%. So if it comes in at 4 point something, more than double where they want it to be.
Let's hope it doesn't stay up there for too long, because while we're all impacted, the most vulnerable parts of society are feeling the pinch most. Thanks for listening, team. We'll talk again soon. Enjoy your week.
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