New inflation indicators are steps in the right direction

Child Poverty Action Group (CPAG) welcomes the decision made by Statistics New Zealand to produce a new set of inflation indicators – household living-cost price indexes (HLPIs). Given the Government decisions around both monetary policy-setting and adjusting a range of public and private payments are underpinned by the inflation measure, it is surprising that so few organisations provided submissions to this investigation. CPAG was one of the few.

The consumers price index (CPI) represents the change in prices experienced by households on average. The new HLPIs will highlight differences in household expenditure patterns to show how differently placed households experience inflation.

The HLPIs look at eight household groups: beneficiaries, income quintiles (five groups), Māori, and superannuitants. The primary use of income quintile price indexes for CPAG will be to monitor any changes over time in the levels of hardship experienced by the two bottom quintiles.

As currently measured, inflation has been almost zero over the last year. This meant that core benefit rates did not increase for CPI changes in 2016. Minister for Social Development, Anne Tolley, acknowledged that “benefit rates have not seen any real increase in 43 years.”

Unlike NZ Super rates that are linked to the average wage, core benefit rates are linked to inflation, making the calculation of inflation a critical factor in the well-being of beneficiaries.

Working for Families (WFF) tax credits are adjusted only when cumulative inflation reaches 5%. This has meant that since 2012 there has been no CPI increase in WFF. Families working part-time for low wages are unlikely to get the In-Work Tax Credit (IWTC) and so do not benefit from the Government belatedly increasing this fixed, unindexed amount by $12.50 per week.

Families are hurt when the inflation measure used does not reflect their experienced increased cost of living. Rent increases matter more than many of the items included in the basket of goods that are used to calculate CPI inflation. While the official rate of inflation in 2015 is minus 0.25%, rents increased across New Zealand by 4.2%, and in Auckland by 10%.

The Ministry of Social Development reports that in the mid-1990s, 28% of children lived rental accommodation. By 2012, this figure had risen to 43% of all children [1]. In Auckland many more were actually living in a caravan, a garage, or a car. Given the falling rates of home ownership, rapidly rising rent prices, and increased reliance on third-tier lending, particularly for families in the two bottom quintiles, the proposed change from reliance on mortgage debt as a measure of consumer debt to measuring price change for interest payments on all consumer debt is a welcome improvement.

Whatever its source, when family income is inadequately adjusted for increased costs of living, children in low-income families are particularly affected. The MSD’s 2015 report showed that poverty rates are higher for children than for the population as a whole, and 39% of the 220,000 to 250,000 children in poverty live in families supported by a market income [2].

The consumption patterns of families in the lower quintiles will be distinctly different to families with higher incomes. The new HLPI may help to reveal changes in the levels of hardship, and give the Government the required evidence for increases to benefit rates and WFF tax credits.

[1] Perry, Bryan. (2015). Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2014, Ministry of Social Development, Wellington, at, p. 122.

[2] Perry, Bryan. (2015). Table H8, p. 134.