BACKGROUND

2.1 The CPI is a temporal price index for consumption goods and services acquired by Australian resident households. It is an important economic indicator, providing a general measure of price change. The CPI is used for a variety of purposes, such as in the development and analysis of economic policy, the adjustment of wages and pensions, and in individual contracts.

2.2 The principal purpose of the Australian CPI is to measure inflation faced by consumers to support macroeconomic policy decision making. This is achieved by providing a measure of household consumer inflation by the acquisitions approach. Prior to 1998 however, the index was designed primarily for income adjustment purposes, and was compiled on an outlays approach which reflected all out-of-pocket expenses (including interest payments).

2.3 As part of the 16th series review the ABS invited comment on:

• whether measuring inflation faced by households (using the acquisitions approach) should remain the principal purpose of the CPI in Australia;
• the role of the CPI in the face of emerging community needs; and
• the usefulness of supplementary indexes as measures of inflation affecting population subgroups.

2.4. The Information Paper: Issues to be considered during the 16th Series Australian Consumer Price Index Review (cat. no. 6468.0) identified three principal purposes and corresponding conceptual approaches to constructing a CPI. These are discussed briefly below and in more detail in Appendix 3.


The acquisitions approach

2.5 If the CPI is intended to be a measure of household consumer inflation, the basket of goods and services priced can be defined as consisting of all consumer goods and services actually acquired by households during the base period (i.e. the acquisitions approach). Market prices for goods and services are exclusively utilised (the ABS defines market prices as inclusive of taxes, and exclusive of subsidies). Non-monetary transactions (i.e. imputed prices, such as imputed rent) and interest rate payments are excluded.

2.6 Key aspects of a CPI constructed on the acquisitions approach are as follows:

• expenditure on services, explicitly charged for financial services (including investment related financial services - see Appendix 3 for further clarification), non-durable and durable goods;
• indirectly measured financial services such as financial intermediation services indirectly measured (FISIM) (including investment related financial services);
• owner-occupied housing (OOH) - net acquisition of new dwellings excluding land (i.e. gross fixed capital formation (GFCF) of houses); and
• exclusion of non-monetary transactions, mortgage interest and consumer credit.

The cost-of-use approach

2.7 If the CPI is intended to be a measure of a change in living standards, the basket consists of all those consumer goods and services actually consumed (i.e. cost-of-use) in the base period irrespective of when they were acquired or paid for.

2.8 Some imputed expenditures are included within the scope of a CPI on a cost-of-use basis on the grounds that the goods and services acquired in non-monetary transactions affect households’ living standards. To account for household welfare, flows of services to a household from durable items are measured, e.g. the services consumed by the household from residential structures owned wholly or in part by the occupants (see Appendix 4).

2.9 Key aspects of a CPI constructed on the cost-of-use approach, measuring goods and services consumed, are as follows:

• expenditure on services, explicit financial services (including investment related financial services), non-durable and most durable goods;
• indirectly measured financial services such as FISIM (including investment related financial services);
• imputed expenditure on services from durable goods, OOH; and
• exclusion of mortgage interest and consumer credit.

The outlays approach

2.10 When a CPI is intended to maintain the purchasing power of incomes (i.e. for the adjustment of incomes), the measurement of actual money flows out of the household is captured (i.e. out-of-pocket living expenses). The basket is defined in terms of the actual amounts paid by households during the base period to gain access to consumer goods and services (including interest payments). The capture of these interest payments is the main point of difference to alternative measures.

2.11 Key aspects of a CPI constructed on the outlays approach, measuring out-of-pocket living expenses, are as follows:

• expenditure on services (excluding financial services), non-durable and most durable goods;
• gross insurance charges;
• consumer credit charges; and
• mortgage interest on the durable good OOH.

2.12 The ABS has developed a series of analytical measures, based on the outlays approach, which have been designed specifically to measure the impact of changes in prices on the out-of-pocket living costs experienced by selected groups of Australian households. The most recent addition to this family of indexes is the Pensioner and Beneficiary Living Cost Index (PBLCI), which was developed in 2009. The ABS is currently undertaking work to improve the accuracy of expenditure estimates for the PBLCI reference population (i.e. age pensioner households and other government transfer recipient households) and to determine the need for improved coverage of outlets and products.

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