The CPI and consumer perception

It is the job of the Reserve Bank of New Zealand to keep the consumer price index (CPI) between 1 – 3% aiming for 2%. However, to many people the CPI is foreign to them and price stability is impossible to define unless you specify which prices you mean.

How we perceive inflation is quite different from those that calculate the CPI. Consumers don’t keep records of how much they pay for everything they buy but have a general sense of what their living costs are. The average consumer doesn’t look at the CPI but perceive inflation when it starts having a visible effect on their lives. This is why food and fuel prices matter and their contribution to inflation perceptions is greater than their weighting in the CPI. The RBNZ might say that inflation has fallen from 7.2% to 4.7% over the last December year but the consumers perception is quite different. The consumer notices that the supermarket shopping bill and fuel prices are a lot higher than this time last year and the fact that it is still rising albeit at a slower rate (disinflation) doesn’t really bring any solace. Food prices are what economists refer to as being sticky – once they go up in price they are unlikely to come down. Consumers would like prices to go back down but that would mean deflation something that the RBNZ wants to avoid.

Therefore it is basically impossible for the RBNZ to control inflation in a way that would please most of the population. The video below from the Wall Street Journal looks at some of these issues and consumer sentiment.

Source: Thoughts from the Front Line – Monetary Dilemma. 30-3-24. John Mauldin

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