THE INDEX NUMBER

Dominion, Volume 14, Issue 192, 10 May 1921, Page 9

THE INDEX NUMBER

MEASURING PRICE MOVEMENTS GOVERNMENT STATISTICIAN EXPLAINS THE SEASONAL FLUCTUATIONS The "index number” is the subject of a statement by the Government Statistician in the ."Monthly Abstract of Statistics.” The',points he raises are of general interest in view of the fact that the index number, which was used by the Arbitration Court in the assessment of cost-of-living bonuses is now declining. "Notwithstanding the’ comparatively recent publication of the Report on Prices, 1891-1919, and the several explanatory references made in the Monthly Abstract, there still appears to exist some misconception as to the official retail price index numbers,” says the Government Statistician. “It seems desirable. therefore, to again emphasise just what is and what is not measured by "tty, movements of the index numbers. "These index numbers are designed solely for (the purpose of measuring movements in the level of retail prices. They do not measure movements in the ’cost of living,' if by that term is meant variations in the actual household expenditure on food, rent, clothing, etc. Were householders to maintain the same standard of living (i.e., to purchase for consumption the same quantity of simi-lar-quality goods) as existed in the base period, then the index numbers, for the commodities they cover, would also accurately represent changes in 'cost of living.’ In this sense movements in 'cost of living’ are governed not so ..much by the movement in retail prices as by the scope of the household income. within the limits of which. ex-

penditure must be kept whatever the

price movement. The effect of increases in. price on the 'cost of living’ in this sense, if the income does not also correspondingly expand, is tb vary the proportions devoted to the respective groups of commodities—increased expenditure on the more essential necessaries. food, housing, etc., being effected by economies in the less essential necessaries, such as clothing and other miscellaneous items. . "In the sense used above also it would", be quite impracticable to obtain data from month to month of the change in consumption of the various commodities even if index numbers could he compiled therefrom. Moreover, such index numbers. even if compiled, would be meaningless as measures of variation, since with both factors (price and quantity) changing there can be no comparison, nor can any significance be attached to the extent of the variation. Hence it is essential that one of the factors be stabilised or standardised, and remain constant throughout the investigation; the carpenter’s rule, the grocer’s scales, etc.) must always be the same, or there is no • true measure. In this case the quantity of the various commodities consumed—the 'regimen—is the standard of measure, and the variations and movement in the other factor, 'price,’ and these only, are what is measured. As an indication of the variation in the 'cost of living’ (using the term in either sense), so long as the 'regimen’ is true to common usage, and so far as 'regimen’ covers the whole of the commodities entering into the household budget, the index number on this basis is the most accurate and reliable guide obtainable.

"The 'regimen’ adopted, as so often previously explained, covers only the expenditure on food, house -ent, and fuel and light, representing in the base period some three-fifths of the household expenditure; and. therefore, in dealing with or using the index numbers, it should always be borne in mind that the movements shown do not cover the whole field, and refer only to this portion of the ’ expenditure. The index 'number will reflect the movement in price of the whole of the expenditure only if the- prices relating to the two-fifths not covered have moved in the same direction and to the same extent, on j:he average. So far as' the 'regimen’ covers the household expenditure, the household budgets collected in 1919 show that it is still closely in accord with common usage. "The next point to notice is that the weights assigned to the different commodities in the 'regimen' are based on the consumption of the year, and the truest measure is the index of one year compared with the inclex of any other year. In using the index for any lesser period—a month, a, quarter, or a halfyear—a closer regard must be had to the cause of the movement, since owing to seasonal and other changes in supply on account of price, taste, or otherwise, variations in the household consumption of certain commodities included in the 'lesimen’ do undoubtedly take place, and consequently at such times the pricemovement. which alone is reflected in the index, diverges most of the expen-diture-movement. Eggs may be mentioned as an outstanding example of commodities particularly susceptible to seasonal fluctuations in price, their average monthly predominant price in Wellington during 1920 haring ranged from 2s. 2d. to 4s. sd. per dozen. Naturally, in these circumstances their consumption throughout the year would vary very considerably; and obviously, while their weight in the 'regimen’ is true for the whole year, it will in any given month be untrue to the extent of the variation in consumption. If, however, proper regard is had as stated, to the causes affecting the movement, it eari readily bo determined whether the/ variation is seasonal or more permanent. With similar care as to when a seasonal commodity camo into, general use (in some years it is earlier, jn others later, according to climatic, conditions) legitimate comparisons may be made between corresponding months or periods of different years, "As in the case of the selection of commodities for the 'regimen,’ common Usage also governs the prices quoted by retailers. Tho detail prices used in the compilation of the index number are the average predominant prices—i.e., the arithmetic averages disclosed by a number of returns from each centre which quote the prices for the grade or qualify of goods in respect of which, the respective tradesmen make the bulk of their sales. In seasonal commodities such as potatoes the change-over from the old to the now always involves a step in price. This step is not, however. taken immediately the new commodify comes on the market. W any arbitrary period throughout the Dominion determined by the Census and Statistics Office, but by the consuming public: as soon a« n. tradesman is selling more new potatoes than” old he returns the new price, but not till then. The month in which the new price comes into common use varies in different centres and in different towns. , Consequently the movement in the index number in this case is actually in sympathy with the 'expenditure.'"