Inflation adjustment before breakfast

I saw this story in the Herald and didn’t read it in detail, just thought it was an interesting calculation to do

The Financial Times reported last week that the average global price of eight breakfast staples had risen almost 25 per cent this year.

The increases mainly affected coffee, orange juice, wheat, sugar, milk, butter, cocoa and pork.

We decided to create a Kiwi version of the Financial Times story and Statistics NZ food price figures reveal New Zealand families are not exempt from the trend.

David Farrar did read the story, and so was rather less impressed, as he also mentioned on Twitter.  The problem is that the calculation was done wrong.

If you served tomatoes, mushrooms, bacon, toast, eggs, tinned spaghetti and cereal, with coffee, tea and orange juice this weekend, it would have cost you 6.9 per cent more than the same meal in 2008, and almost 3 per cent more than in 2012. Breakfast food prices have risen more quickly than other prices.

Over the past five years, the compound average annual rate of inflation was 2.1 per cent.

If the average annual rate was 2.1%, which sounds about right, the total increase over five years would be 2.1% five times, which turns out to be 11%. Since 6.9% is less than 11%, breakfast food prices have risen less quickly than other prices. Quite a bit less. The story has it completely backward.

If you’re reading especially carefully, you might also notice that it’s more than five years from “this weekend” back to 2008 — for example, a comparison of end of March 2008 to this weekend would be a six year period.

This is the sort of thing that a subeditor should spot. It’s also the sort of thing the RBNZ inflation calculator is useful for — you put in a number and two years and it does the calculations.  If you use the calculator, you find that “this weekend” is apparently December 2013, and the 2008 comparison is December 2008, rather than March 2008 to March 2013. You’d also see that the sub-index for food had increased less than the total CPI, which would presumably make you more suspicious about the story.

There’s also some discussion of individual item prices. This doesn’t have the awful 5:1 error ratio of the main argument, but it still demonstrates where a bit of thinking could have helped

Mild Arabica coffee was trading on the commodity markets for US$1.76 ($2.03) a pound (453g) in February, up from US$1.35 in January. Mild Arabica coffee was trading on the commodity markets for US$1.76 ($2.03) a pound (453g) in February, up from US$1.35 in January.

If you go to the Countdown website you find that their Signature range coffee beans cost NZ$6 for 200g, or roughly US$12 per pound. Obviously most of the cost is not the wholesale commodity price. That’s presumably even more true for instant coffee (the authentic version of the beverage in a ‘traditional cooked breakfast’)

The components of the CPI that have increased fastest aren’t all that surprising if you read the Herald regularly. For example, the cost of home ownership was up 27% over that five-year period, insurance was up 26%, education, and cigarettes and tobacco were up 67%.

If some things go up faster than average, others must go up slower or even decrease. Household appliances and furniture are down a bit. Telecommunications equipment, computing equipment,  and telecommunications services have gotten much cheaper. You can hardly give away a 2008 phone or computer (though if you’re trying to, Te Whare Marama refuge will put it, and more recent kit, to good use)