Saturday 16 December 2017

Inflation index is based on an out-of-date shopping list

The recession will have a profound impact on the CPI 'basket of goods', says Ken Griffin

THEY documented the nation's love affair with champagne, smoothies and fake tan five years ago, but the Central Statistics Office (CSO) now looks set to confirm the demise of the Celtic Tiger's culture of excess.

In recent months, CSO researchers have been trawling the country, surveying consumer spending patterns to compile a new basket of goods and services for the Consumer Price Index (CPI), which is used to measure inflation.

The CPI is calculated using the prices of more than 600 goods and services chosen every five years after a national Household Budget Survey.

The survey was last conducted at the height of the property bubble in 2005, leading to the introduction of champagne, fake tan, smoothie makers and replica jerseys to inflation calculations.

As a result, the basket has become slightly divorced from the reality of current spending patterns and experts believe the new survey will bring a major overhaul of its contents.

"The recession will have a profound impact on the basket of goods because we should see a greater focus on basics rather than luxury goods," said Austin Hughes, chief economist at KBC Bank. "The staples such as food and clothing will remain, but there will be some curtailment of luxury expenditure."

Hughes stressed, however, that the extent of the changes would be limited because radical changes to the CPI would require massive shifts in consumer behaviour or the introduction of charges such as property tax or third-level fees.

"Some of the more subtle changes will also be difficult to highlight. For instance, the CPI records whether people are buying shirts or not -- but it doesn't distinguish where they buy them. This means that Charvet shirts and Lidl shirts are recorded in an identical fashion," he said.

This makes it difficult to distinguish between those consumers who are trading down to cheaper brands of a product and those ceasing to buy that product altogether.

The other issue is that the CPI is designed to reflect the nation's average household expenditure, which Hughes believes could prevent a wholesale clear-out of goods associated with the champagne lifestyle of the property boom.

"Some sectors have been affected differently, so not all households have cut back equally," he said. "This means changes in consumption patterns are averaged out."

In fact, the only guaranteed changes will be among the basket's electronic goods, despite a major cull in 2005 which saw items such as Walkmans, portable TVs, VCRs and cassettes removed.

"The ongoing change in terms of technology and the internet has been significant over the past five years and there will be changes so the basket keeps up with this trend," said Hughes.

A comparison with Britain's basket of goods, which is updated annually, reveals just how outdated this element of the Irish CPI has become.

One of the most striking examples of this is the fact that the Irish basket of goods excludes internet music downloads, which is how most singles are now sold, but includes the obsolete CD single format.

Other common electronic goods not included in the Irish basket are Blu-ray discs and players, the most recent iPods, digital radios and mobile phone downloads.

Although a high-powered group of government officials and economists, including An Bord Snip Nua's Colm McCarthy, have discussed the general shape of the new CPI, the CSO won't reveal the basket's contents until next year.

A spokesman explained that it would another 12 months to collate the findings of the household surveys which determine the basket's composition. The delay is due to the sheer scope of the survey, which involves over 6,000 randomly selected households and 50 interviewers. CSO staff must also sift through up to 20,000 expenditure diaries produced during the process.

But he said the CSO was keen to build up a picture of how several key aspects of consumer behaviour had been affected by the recession, including whether falling incomes had translated into reduced purchases of consumer goods.

Previous surveys had recorded significant rises in both disposable incomes and household spending, which have consistently risen since the Eighties. The 2005 survey found that disposable incomes had risen by 52 per cent since 2000, resulting in a 36 per cent rise in spending.

"Our hope is that we will have the most comprehensive picture of consumer spending patterns conducted since the recession began," he said.

"In particular, we are hoping to capture the level of cross-border and internet expenditure. We also plan to conduct our first nutritional analysis of the national diet."

Sunday Independent

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