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PRICE INDEXES AND CONTRACT PRICE INDEXATION
Households have been categorised to these groups based on principal source of household income, derived from the 2003-04 Household Expenditure Survey (HES). These household groups account for just over 90% of Australian households.
The indexes represent the conceptually preferred measures for assessing the impact of changes in prices on the disposable incomes of households. In other words, these indexes are particularly suited for assessing whether the disposable incomes of households have kept pace with price changes. The Australian Consumer Price Index (CPI), on the other hand, is designed to measure price inflation for the household sector as a whole and, as such, is not the conceptually ideal measure for assessing the impact of price changes on the disposable incomes of households.
The main difference compared to the CPI is that the living cost indexes include interest charges but do not include house purchases. Insurance (other than health insurance) is also treated differently in the living cost indexes. The weight for insurance in the CPI relates to the net value of the service provided by the insurance company (in simple terms, the amount of premiums paid by households less the amounts reimbursed by way of claims). In the living cost indexes, the weight relates to the gross value of insurance premiums paid by households.
A further difference is that the regional weights for the CPI are based on the HES distributions in the capital cities, whereas the weights in the analytical living cost indexes are based on the HES distributions for the State or Territory. This produces more reliable weights for some of the smaller expenditure categories in the analytical series.
With the exception of interest charges, all price measurements used in the analytical living cost indexes are taken from the CPI. CPI price movements for lower level commodity categories are applied to the expenditure patterns of the four household types. Not all CPI items are used in each of the indexes. For example, child care prices are not applied for Age pensioner and Self-funded retiree households. In other cases only selected types of prices in each category are used. For example only concession prices are selected for some health items for Age pensioner and Other government transfer recipient households.
EXPENDITURE PATTERNS OF THE SELECTED HOUSEHOLD TYPES
Calculation of the aggregate impact of price changes on each of the household types involves weighting together the price movements recorded for individual goods and services. For each household type, the weight assigned to any particular good or service reflects the proportion of total household expenditure accounted for by expenditure on the item.
Table 1 shows average weekly expenditure per household during 2003-04 for each of the four household types, at June quarter 2005 prices. The commodity grouping used corresponds to the commodity groups used for the current (15th series) CPI.
Table 1 illustrates significant differences in expenditures, both in total and at the individual commodity group level across the household types. Although differences in incomes are likely to be a major reason for this, other factors such as the demographic make-up of the households and dwelling tenure would also play a part. For example, Age pensioner households have on average the lowest number of persons per household and a higher than average rate of outright home ownership.
Table 2 presents the same data in percentage terms. It is this data that produces the expenditure shares or weights that are given to each household type, and to which the price movements are applied.
TABLE 1: ESTIMATED AVERAGE WEEKLY EXPENDITURE DURING 2003-04 BY COMMODITY GROUP AND HOUSEHOLD TYPE AT JUNE QTR 2005 PRICES(a)
TABLE 2 : EXPENDITURE WEIGHTS BY MAJOR COMMODITY GROUP AND HOUSEHOLD TYPE AT JUNE QTR 2005 PRICES
There are some notable differences in the expenditure weights across the household types. For example, the proportion of expenditure allocated to Food is highest for Age pensioner households. It is also relatively high for Other government transfer recipient households. Employee households allocate a higher proportion of their expenditures to Transportation, Education and Financial and insurance services (which includes interest charges) than the other household types. Other government transfer recipients allocate higher proportions of their expenditures to Housing, Alcohol and tobacco and Communication. Self-funded retiree households have higher relative expenditures on Household contents and services and Recreation than the other household types. Health costs account for a significantly higher proportion of expenditure of Age pensioner and Self-funded retiree households.
Over the four quarters from June 2005 to June 2006, changes in living costs ranged from a low of 4.5% (Employee households) to a high of 5.0% (Age pensioner households). The CPI rose by 4.0% over the same period. Over the eight year period covered by the indexes, changes in living costs for each household type has tracked quite closely to the CPI. Self-funded retirees experienced a slightly lower increase of 26.9% compared to the 27.4% increase in the CPI. The living costs of Age pensioner households showed the highest increase of 29.2%, Other government transfer recipient households by 28.7% and Employee households increased by 28.6%.
The index series for the various household types from June quarter 1998 to June quarter 2006 are shown in Graphs 1 to 4 and quarterly percentage changes in the indexes in Graphs 5 to 8. The data on which the Graphs are based are provided in Appendix 1.
GRAPH 1: INDEX NUMBERS FOR EMPLOYEE HOUSEHOLDS
June quarter 1998 = 100.0
GRAPH 2: INDEX NUMBERS FOR AGE PENSIONER HOUSEHOLDS
June quarter 1998 = 100.0
GRAPH 3: INDEX NUMBERS FOR OTHER GOVERNMENT TRANSFER RECIPIENT HOUSEHOLDS
June quarter 1998 = 100.0
GRAPH 4: INDEX NUMBERS FOR SELF-FUNDED RETIREE HOUSEHOLDS
June quarter 1998 = 100.0
GRAPH 5: EMPLOYEE HOUSEHOLDS, PERCENTAGE CHANGE (from previous quarter)
GRAPH 6: AGE PENSIONER HOUSEHOLDS, PERCENTAGE CHANGE (from previous quarter)
GRAPH 7: OTHER GOVERNMENT RECIPIENT HOUSEHOLDS, PERCENTAGE CHANGE (from previous quarter)
GRAPH 8: SELF-FUNDED RETIREE HOUSEHOLDS, PERCENTAGE CHANGE (from previous quarter)
Changes over the last 12 months in the price indexes at the equivalent of the CPI commodity group level are presented in Table 3. Differences in the price experiences of household types at the group level reflect differences in expenditure weights at the lower levels and different treatments of housing, interest charges and insurance compared to the CPI.
TABLE 3: CHANGE IN LIVING COST INDEXES BY COMMODITY GROUP JUNE QUARTER 2005 TO JUNE QUARTER 2006
The index points contribution to the totals are presented in Table 4.
The change in a component item's points contribution from one period to the next provides a direct measure of the contribution to the change in the All groups index resulting from the change in that component's price. Points contribution and points contribution change can be useful when analysing the relative impact of price change of various commodity groups on total price change.
TABLE 4: CONTRIBUTIONS TO TOTAL INDEX NUMBERS BY COMMODITY GROUP
JUNE QTR 2005 TO JUNE QTR 2006
RESULTS FOR COMMODITY GROUP
At the group level the largest price movements recorded for each household type were for Food and Transportation. This is consistent with the impacts of fruit and automotive fuel prices respectively on those groups in the CPI. Fruit prices rose 64% in the year to June 2006 and this was mainly attributable to an annual increase of approximately 330% in the price of bananas due to shortages created by Cyclone Larry in March 2006. For a discussion of the impact of bananas on the CPI see the June and September Quarter 2006 issues of Consumer Price Index, Australia (ABS cat. no. 6401.0). Automotive fuel prices rose by approximately 25% over the same period.
The higher increase in the Food index for Age pensioners and Self-funded retiree households reflects higher relative expenditure on a certain food items, particularly fruit, which had relatively higher price increases through the year and less relative expenditure on eating out which had a relatively smaller increase.
In the Housing group, all household types had price increases above the CPI. There is a conceptual difference in these series compared to the CPI in that House purchase is not included (see the explanatory notes for more information). House purchase increased by 3.6% in the CPI. Utilities and Property rates, which have a greater weight in the analytical series compared to the CPI, rose by 5%.
Differences across the selected households groups for Household contents and services can be largely explained by child care costs. Child care fees increased 12.4% through the year to June quarter 2006. While employee households have significant expenditure on child care, there is relatively less expenditure by Other government transfer recipient households and negligible expenditure among Age pensioner and Self-funded retiree households.
The slightly higher increases in Health costs experienced by the household groups other than Employee households can be attributed to higher increases in concession PBS prices compared to non-concession PBS costs.
The increase in the Transportation index for Age pensioners and Other government transfer recipient households reflects higher relative expenditure on automotive fuel and less relative expenditure on new motor vehicles, which decreased by 0.9% through the year.
The larger increase in the Recreation index for Age pensioner and Self-funded retiree households is due to their lower relative expenditure on audio, visual and computing equipment, which decreased 4.7% over the year, and higher relative expenditure on domestic holiday travel and accommodation, which increased 6.9% over the year.
The Financial and insurance services commodity group in the CPI includes financial institution fees, charges and service margins and insurance calculated net of claims. The CPI recorded an increase of 2.2% for this group through the year. The CPI does not include interest charges on mortgages or on consumer credit which are included in the analytical indexes. Relative large increases in interest charges on home loans (reflecting both rising house prices and increasing mortgage interest rates) resulted in all the selected household groups having significantly higher price increases for this group compared to the CPI. The largest increase for this group was recorded by Employee households, with a rise of 5.9%, followed by Other government transfer recipient households with 5%. As Age pensioners and Self-funded retiree households have relatively less expenditure on interest charges, they experienced more moderate overall increases in prices for this commodity group.
These analytical indexes have been designed to answer the question:
‘By how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?’
In the long term changes in living costs have been broadly similar across the selected household types. They have also been broadly consistent with the CPI. Analysis for the year to June 2006 shows annual percentage changes for all household types to be above the CPI. These differences have come about for a number of reasons. The inclusion of interest charges in the analytical indexes has had a significant impact for Employee and Other government transfer recipient households. The different treatment of housing has contributed to higher increases for Age pensioner, Other government transfer recipient and Self-funded retiree households. Different weighting patterns for food items have contributed to price rises exceeding the CPI for Age pensioners and Self-funded retiree households, much of which can be attributed to fruit prices. Similarly, higher relative expenditure on fuel has lead to price rises above the CPI for Age pensioner and Other government transfer recipient households. Prices for some concession items, such as PBS costs, have also increased compared to their non-concession counterparts impacting on Age pensioner and Other government transfer recipient households.
For more information about analytical living cost indexes, contact Lee Taylor on (02) 6252 6251 or email <firstname.lastname@example.org>.
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