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Prices are an inequality issue

We most often think about inequality in terms of income or wealth, but what if some people also experience the cost of living differently? What if the costs that one household faces go up more quickly than the costs of another household? That could add to – or subtract from – income inequality. Until now we have in practice assumed that everyone faced the same average rise in living costs – for more than a century we have used the familiar Consumer Price Index (CPI) as the standard measure of rises in the cost of living.

It turns out that in recent years at least, it has not been a particularly good measure.  Earlier this month, Statistics New Zealand launched a new series of price indexes: the Household Living-Cost Price Indexes (HLPIs). They tell us a lot more about inequalities in the cost of living.

They show prices experienced by households of a number of different types: five different levels of income, five different levels of spending, beneficiary, Māori and superannuitant households. Because each type of household spends in different proportions they experience different costs of living. For example, in the lowest income and lowest expenditure households, out of every $100 spent, twice as much goes on rent, energy and other housing expenses than in the highest income and expenditure households. In the opposite direction, the highest income and expenditure households spend two to three times as much on interest payments and half as much again on transport (mainly due to buying new cars and air travel) out of every $100 than the lowest income households.

It makes a lot of difference. Since June 2008, when the HLPIs start, prices have hit low income, low spending, beneficiary and superannuitant households much harder than higher income, higher spending households, and harder than the CPI showed.  The lowest spending households saw living costs rise by 18.2 percent, twice that for the highest spending group which saw costs rise 9.1 percent. CPI rose over the same period by 13.9 percent.

Unions should consider using these new indexes in pay negotiations.

Download the full bulletin: CTU Economic Bulletin 184 – November 2016