The Course Of Prices: 1860 to Today

An appendix for Not in Narrow Seas: New Zealand History from an Economic Perspective

The work was funded by a grant from the Reserve Bank of New Zealand which is not responsible for any errors or interpretations. A version was presented to an RBNZ seminar on 1 March 2012.

Keywords: Macroeconomics & Money; Political Economy & History; Statistics;

This appendix is primarily about the course of the level of various groups of aggregate prices. Historically economic historians monitored prices because they were readily available, while measures of output were not, although the sophisticated theory of the construction of price indexes is more recent, as are modern theories of the determinants of prices.

Price comparisons – over time (or between locations) – are more complicated that the casual way we often make use of them; consider comparing the price of today’s car with that of a car a hundred years ago. Price indexes (which involve the aggregation of prices) have the additional complication of changing patterns of consumption with new products entering and old ones leaving – there were no cars two hundred years ago while horse and buggies hardly exist today. Add to these deep conceptual issues, that the early data are rarely collected in a systematic way. (Meanwhile technicians will grumble about the treatment of durables, especially housing in the consumer price index, and borrowing costs have varied over time). Despite all these caveats, the overall pattern of price change over the history of New Zealand is clear enough, providing we dont insist on accuracy to the last decimal point.

New Zealand price indexes go back 150 odd years to about 1860. We shall look here at those for imports and exports, and for consumers. Additionally we add the GDP deflator (GDEF) which goes back to 1914/5, explaining below why for some purposes it is a better indicator of price changes that the Consumer Price Index (CPI).

The Course of External Prices: New Zealand and British External Prices

Because New Zealand is a small dependent economy, we begin with comparing the New Zealand experience with that of Britain, because it was the main source of imports and destination for exports for most of New Zealand’s history. The comparison ends in 1971, when the New Zealand currency disconnected itself from sterling following the Smithsonian upheaval when the world ended any pretence that it was on a gold standard. By that time Britain was becoming a less important economy to New Zealand.[2]

A natural comparison is to compare New Zealand import prices (the indexes go back to 1861) with the British export prices. Since the products ought to be of roughly comparable composition, we might expect the two move in parallel in the long run. However as Graph II.1 shows the relative price of British exports to New Zealand imports roughly halved between the mid-nineteenth century and the mid-twentieth.[3] It is such a dramatic change one might wonder if it is part a statistical artefact, although other than that the nineteenth century New Zealand import price indexes are not that reliable there is no obvious explanation. [4] In any case the fall seems to continue after 1914 when an official import price index cuts in.

Since prices are measure at the wharf of arrival, the two price sets are not quite comparable. Either transport costs (freight and insurance but also holding costs) should be deducted from the New Zealand import prices (at the New Zealand wharf) to compare them with British export prices (at the British wharf) or the transport costs should be added to the British prices.

Now there have been dramatic improvements in transport – the switch from sail to steam, the shorter route through the Panama Canal, the greater reliability of the trips, improved handling on wharves, and so on – one might expect the ratio of New Zealand prices (on its wharves) to British prices (on its wharves) to fall. But that dramatically? It is noticeable that from the 1930s there appears to be little reduction – did containers have only a marginal effect? Perhaps there is a composition effect which is not being allowed for.

To add to the puzzle Graph II.1 also shows the New Zealand export prices relative to British import prices has been constant.[5] In this case the composition of the two indexes is quite different, since New Zealand was a specialised exporter to Britain while Britain imported many other products which New Zealand did not provide. However when the British import prices are confined to food only (including grain) the patterns remain much the same.

Assuming that there was some fall in transport costs too, the implication is that the prices for New Zealand exports (mainly pastoral products) was falling relative to the price of most British imports.

The Terms of Trade: The Balance Between Export and Import Prices

The ratio of export prices to import prices (measured at the same wharves) is called the (commodity) ‘terms of trade’. Their importance arises from the purpose of exports is to earn foreign exchange in order to the purchase of imports. If the relative price of exports goes up (the terms of trade rise) the foreign exchange earnings from the same volume of exports can purchase more imports. Insofar as imports are vital for prosperity, a rise in the terms of trade is greatly beneficial to the economy.

Note that New Zealand has little influence over its terms of trade (an exchange rate change changes the New Zealand value of the export and import prices by the same proportion so their ratio does not change). That means practically they may be treated as exogenous for analytic purposes.[6]

As Graph II.2 shows there is considerable year to year fluctuations. To assist interpretation a nine year moving average is also shown, but that still shows some cyclical fluctuations . Additionally four trends are imposed and are discussed below. An overall conclusion might be that the much of New Zealand’s economic performance is driven in part by the terms of trade.

(Until the mid 1980s, about half the time the actual terms of trade are at least 10 percent from the shown trend lines. Given that exports are about a third of GDP, this means that about a quarter of the time national income adjusted for the purchasing power of imports is about 3 percent or more than in simple production terms, and about a quarter it is 3 percent or less. Given that normal per capita growth is about 1.5 percent a year, the New Zealand economy experienced violent fluctuations from the changing balance between export and import prices.)

Nineteenth Century to about 1908

Graph II.2 shows a rise in the terms of trade from the 1860s to 1908 – an increase of about 36 percent in 42 years, a not inconsiderable gain (say a 12 percent boost in income relative to production). As it happens this is a period of relatively strong growth of the New Zealand economy (aside from the stagnation of the Long Depression). It is instructive that the peak tends to be in the middle of the first decade of the twentieth century when other indicators also suggest New Zealand went through a climacteric.

1908 to 1949

From 1908 the rising trend reverses although the decline is not quite as steep. There is a problem of just how to interpret the end of the 1940s, perhaps because the pattern is about to change. (We shall meet the same problem in regard to the early 1980s.) But if we think of the decline continuing then, by the end of the 1940s the terms of trade were similar to the level of about 1880. That is a fall of around 20 percent. That is consistent with the period largely being one of economic stagnation, the post-recession and war boom aside.

(There is a possible alternative interpretation of the terms of trade up to 1950, in which their trend is flat – or even slightly falling – except there is a lift between 1895 and 1908, followed by a fall back to the previous level by 1921. That possibility is also shown in Graph II.2)

1950 to 1985

Perhaps the best explanation for the level in immediate post-wear era is that, although it did not seem so at the time, post-war affluence was underway, but inertia initially depressed the prices for New Zealand exports relative to its imports. The Korean war triggered a readjustment unleashing the demand for New Zealand pastoral products, thereby lifting the terms of trade.

In any case, the terms of trade leap up in 1950 in a way which at first was not too different from past experiences. However this time they did not as quickly collapse, the decline was much more slowly, through to the early 1980s – back to a level similar to the late 1940s. In the early 1960s the terms of trade will still above the 1908 trend peak (although there had been a bit of a panic in the later 1950s when there had been a cyclical downturn of export prices).

From about the 1970s, New Zealand’s pattern of exports underwent a major diversification (Chapter 3X) which is part of the explanation of the diminishing violence of the fluctuations. Before then the vast majority of exports by value were pastoral products.

The diversification complicates the interpretation of what was going on in the early 1980s, where there appears to be a flat bottom, perhaps waiting for a turn-around similar to the late 1940s.

1985 to 2010

After hitting the bottom in the early 1980s, the terms of trade began to rise again. (The reasons are discussed in Chapter XX but, briefly, the world had gone into a new phase with the rise of hungry industrialisation in East Asia.) By 2010 relative export prices are back to where they were in the mid 1950s (although this time was it was dairy prices rather than wool which led the way). That was about a 30 percent gain, lifting incomes by about 10 percent more than production from the nadir of the 1980s.

Probably because of the diversification there is a decrease in the fluctuations about the trend. Between 1985 and 2010 the terms of trade were only once more than 10 percent away from the trend – in 1989.

In summary, the terms of trade have been one of the main drivers of the New Zealand economy. Their short term fluctuations were a source of fluctuations and cycles in the New Zealand economy, but they also had a longer term effect, for the additional income they created or destroyed affected not only consumption, but savings, capital formation and, hence, productivity growth.

The Real Exchange Rate: The Balance between External and Internal Prices

(A matter of definitions: the discussion in this section divides the economy into the tradeable sector and the non-tradeable sector. The tradeable sector consists of those industries whose products can be sold overseas (although some will be consumed in New Zealand) or produced overseas and sold here. Traditionally the tradeable sector has been the primary (e.g. agriculture, fishing forestry, mining) and secondary (manufacturing) sectors, although nowadays it includes some services (called ‘tradeable services’) such as tourism, but also IT services, consultancy and some education (e.g. students coming to New Zealand). The non-tradeable sector generates products which can be neither exported nor imported. It includes most of the service sector, including government and personal services and internal transport. Formally the real exchange rate is the relative price of non-tradeables to tradeables, although as the final paragraph of this section explains it has been necessary to fudge this definition because of measurement limitations.)

It is possible to construct a Real Exchange Rate back to 1960. It is shown as Graph1rex. The story it tells is that the rate was reasonably constant until 1985then increased in a leap by 50 percent, and seems to have been rising secularly since to a level double that of the 1960s and 1970s. The leap is at the time when the exchange rate was floated. (A complication is that we cannot allow for changes in import protection and export subsidisation which would increase the difference between the pre- and post-1985 level further.)

We cannot tell from this whether the earlier period from 1960 to 1985 or the later one from 1986 to today is unusual. A rigorous measure of the real exchange rate is not available, so we shall have to use less satisfactory one. [7]

The longest available index of internal prices is what is loosely called the Consumer Price Index, although before 1948 it went by other names, such as the Retail Price Index, indicating that there were conceptual differences in its construction. Even after 1948 there have been changes to the treatment of housing and credit which probably means that the index is not quite consistent after that either (Additionally the changing composition of the regimen – the ‘basket’ – as new products are added and old ones deleted and as the weights change, add to the complexity of consistency over time – but this is an integral problem with any price index.)

The official CPI (and its predecessors) was introduced following the 1912 Royal Commission on the Cost of Living, and entered the popular consciousness from about 1920 as the Court of Arbitration began using it in its wage setting. As a consequence it has a public significance far in excess of its economic importance.[8] It covers only about 60 percent of total expenditure, omitting investment and public sector spending. Not all of the prices in that 60 percent are set by New Zealand suppliers, since up to 40 percent (i.e. up to 24 percent of aggregate expenditure) is consumption goods and services sourced from overseas with their prices (or contribution of price to final product) set there.

A further complication is that indirect taxes are usually designed to impact more heavily on consumption spending than on other activities like investment and exporting. Additionally, the external price indexes are not adjusted for border protection nor for export subsidies.

While an expenditure based index is useful for looking at changes in the spending power of New Zealand incomes, it cannot fully reflect the prices which New Zealand producers set. A better measures of those prices set is the GDP deflator (GDEF).

Because GDEF measures the price of value added, it does not directly include import prices. If a producer uses imports, the price in the index is the margin between the price (unit value) of the final product and the price of its import content. If a producer sets its output price to align or be competitive with import prices, then import prices indirectly affect GDEF. [9] A similar argument applies to exports. GDEF includes the price of exports set (or taken) by New Zealand producers, even though the final product may not be consumed in New Zealand.

GDEF is available from March year 1915. The CPI is available from 1861 so Graph II.3 includes them both. [10] That they do not exactly correspond indicates that from year to year consumer expenditure and production prices are not closely aligned, and the CPI is not a very good indicator of producer price setting. [11]

Graph II.3 also shows the balance between internal prices (GDEF or CPI) and external prices as well as Rex. In each case the level of external prices is measured by a weighted (harmonic) average of export and import prices.

A lower ratio means that external prices are relatively higher than internal prices (which is a price signal to export and import substitute). That situation occurred in the period of the Great War and in the post-war period to the end of the 1950s. Especially discouraging conditions for tradeable production was in the 1930s and late 1960s and 1970s.

However the period of greatest discouragement has been since 1985. Either ratio (of GDEF and CPI to the tradeable index) has been higher than at any time in past – even when it was at its lowest in 2001.

More refined analysis might allow a rising trend in the ratios reflecting that the productivity gains in the non-tradeable sector are generally – but not always – lower than in the tradeable sector. (Examples of where gains may be high include telecommunications and transport.) Even so, after 1985 the ratio of non-tradable prices to tradeable prices is considerably higher than can be explained by this.

The New Zealand dollar was floated in March 1985, breaking the traditional linkage between tradeable and non-tradeable prices. In the past New Zealand had been subject to a borrowing limitation because the majority of the borrowing had been done by the government who were subject to close scrutiny and strict disciplines. Under floating, the private sector no longer had to obtain the foreign exchange it wanted by earning it (or from the government) but could directly go borrow offshore (or through the trading banks). Now there was no need to earn it by exporting (or save it by import substitution). Given there were not the need to provide the same incentives to earn and save foreign exchange, the economy reduced the price of tradeable relative to the of non-tradeables, and so the ratio rose. The way it does this is by the exchange rate appreciating. The consequences belong to the main narrative.

The Consequences of a High Real Exchange Rate

The standard trade model shows that a higher real exchange rate causes a greater production of non-tradeables relative to tradeables; that is the economy exports relatively less and does relatively less import substitution. (A consequence is that aggregate productivity will grow more slowly.)

The same standard model can be elaborated to show that when there is full employment a high real exchange rate is associated with a overseas borrowing and a low real exchange rate is associated with overseas lending, although it does say which causes which (and indeed it depends on the economic management regime).

The implications of the high real exchange rates of the floating exchange regime have yet to be fully explored.

The Course of Prices

Earlier we used two indicators of economy-wide prices: GDEF, the price of New Zealand production , and CPI, the price of consumer expenditure. Their level, since when they became available, is shown in Graph II.4 (which uses a ratio or logarithmic scale so that equal distances on the vertical axis represent the same proportional increases). While a trained eye can see patterns, evident to all is the enormous change in the price level – 86 times between the bottom in the 1890s to the top in the last year (2011).

An alternative is to look at the annual changes. They are showed in Graph II.5, as a three year moving average. This period reflects the sort of horizon that current economic policy thinks about inflation. (Note that historically there has been a lot of volatility on the three year moving average – some may be a consequence of measurement error.) Current policy settings suggest that we might interpret the range of 0 to 3 percent p.a. ( averaged over a three years) as periods of ‘low inflation’. If so we can identify the following broad periods.

Up to about 1900: Disinflation

This was a period of disinflation (falling prices) parallelling falling prices in Britain. Prices fell at a rate of 1.2 percent p.a. in the 38 years from the beginning (1861) to the nadir (1899).

From about 1900 to 1935: Low Inflation with Interruptions

The first third of the twentieth century was a period of low inflation with two major interruptions.

The first was the Great War and its aftermath (from about 1915 to 1920) which was a period of high inflation, although consumer prices rose faster than producer prices (because import prices – driven by British inflation) – rose dramatically) and then fell more sharply. The second interruption was the Great Depression when there was for a few years of severe disinflation.

1935 to 1966

In this period annual inflation averaged about 3 percent so it was right at the top of the ‘low inflation’ range. It is noticeable that GDEF and the CPI do not track as closely as at other periods, probably because there was a conscious effort to suppress consumer inflation, although the suppression tended to delay rather than eliminate consumer price rises. (Chapters 28 and 30). There was a second bout of higher inflation after the war with producer prices – mainly export prices – leading consumer prices, but inflation settled down into the low inflation range in the late 1950s and early 1960s.

1966 to 1992: The Great Inflation

For much of the period inflation was persistent and high, running at ‘double digits’, that is exceeding 10 percent p.a. Over the quarter of a century the consumer price level increased more than 11 times, considerably more that the three times in the 105 years between 1861 and 1966.[12] Indeed they increased three times between 1966 and 1978, and trebled again between 1978 and 1987, and the great inflation was still not yet exhausted.

While other OECD countries experienced similar high inflation in the early 1970s (Graph II.3), they soon had in under control, while New Zealand prices continued to inflate. Chapter 3X argues that New Zealand’s exceptionalism followed the collapse of wool prices in 1966 which severely disrupted the economy; inflation was a consequence of the clumsy – and prolonged – adjustment. New Zealand came out of its great inflation with its prices almost doubled (1.8-1.9 times) relative to the weighted OECD average.

After 1992: The Great Moderation

New Zealand returned to a period of low inflation – a little lower than the OECD weighted average.

Appendix: The Data Series

British Import and Export Price Series

B. R. Mitchell (1988) British Historical Statistics, p.526-527. (December years)

The food and import price index was based on data in the tables on pages 456-8, 521-3, 767.

New Zealand Export and Import Price Series and Consumer Price Index (CPI)

Statistics New Zealand Long Term Data Series:,

updated from the Statistics New Zealand current data base.

(December Years)

New Zealand Gross Domestic Product Deflator (GDEF)

1914/15- 1954/5: B. H. Easton (1990) A GDP Deflator Series for New Zealand: 1913/4-1976/7. (Equation 2).

1954/5 – : Ratio of nominal to volume GDP.

(March year data. For the purposes of comparisons with the other series, the March year data is treated as the data for the preceding December year – the OECD has a similar practice.)


An equally weighted average of the American Australian, British, Japanese, G7, OECD Europe and OECD all price increases.

(December Years)


[1]  Noting that some New Zealand imports and exports were shipped through Australia, and that while Australia was a major source of imports, its prices were dependent upon British price levels.

[2]  A later section compares the New Zealand CPI with a weighted OECD one since 1969.

[3]  The New Zealand index is converted into sterling where the currencies are not at parity.

[4]  I constructed the indexes, so I know.

[5]  Gold is not treated as an export for these purposes. It is frequently left out of export price indexes because specie movement is treated as a capital flow (although perhaps newly recovered gold should be treated differently).

[6]  The minor caveats are that it is said that import licensing encouraged long established suppliers not always to source the cheapest import, while the SMP subsidies for mutton (in the early 1980s) led to over-supply which reduced export prices. Both effects reduce the terms of trade but probably not by much. A more significant possibility is that protection of manufactures restricted supply of farm products which, given New Zealand had an significant share of supply into some markets may raise export prices.

[7]  Formally the real exchange rate (REX) is the ratio non-tradeable prices to tradeable prices. This section has used GDEF (and to a lesser extent the CPI) as a proxy for non-tradeable prices. because there is no separate series for non-tradeable prices.However GDEF also contains tradeable prices. The relationship between the true exchange rate and the GDEF to tradeable price ratio is given by

REX = (GDEF/tradeable price – X)/(1-X)

where X is the proportion of tradeables in GDP.

Elementary algebra shows that providing X is reasonably stable – it is – REX and the GDEF/tradeable price ratio move in a similar manner.

[8] It could be argued though, that because of its public significance it has a particular economic importance in that the public’s inflationary expectations are formed about it.

[9]  This property of the price index being based on a regimen which includes imports is a major advantage of GDEF, over the wholesale price index, or the producer price indexes. It is also for a much longer period than the PPIs, and a similar period to the WPI.

[10]  GDEF is set back to the previous December year.

[11]  Between 1970 and 1973, GDEF rose about 10 percent less than the CPI. B. H. Easton (1990) A GDP Deflator Series for New Zealand: 1913/4-1976/7. p. 85.

[12]  Prices fell in the nineteenth century. In 1966 they were five times higher than at the nadir in 1899.

[13]  I am able to construct one from 1959, but it is not long enough for the purposes of this study.

[14] See B. H. Easton (1996) In Stormy Seas, p.61 for a comparison of the NZGDEF relative to the OECD GDEF 1954-1994.