6401.0 - Consumer Price Index, Australia, Sep 2016 Quality Declaration 
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 26/10/2016   
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FEATURE ARTICLE: REVIEW OF THE CONSUMER PRICE INDEX INTERNATIONAL TRADE EXPOSURE SERIES


SUMMARY OF OUTCOMES

The Australian Bureau of Statistics (ABS) has reviewed the classification of the Consumer Price Index (CPI) expenditure classes (ECs) as either tradables or non-tradables. This review maintains the relevance of the International Trade Exposure series.

As a result of this review, five ECs that were classified as non-tradables will be re-classified as tradables: Breakfast cereals, Waters, soft drinks and juices, Gas and other household fuels, Therapeutic appliances and equipment and Newspapers, magazines and stationery; and three ECs that were classified as tradables will be re-classified as non-tradables: Spirits, Tobacco and Pharmaceutical products.

These changes to the classification of ECs will be implemented in the December quarter 2016 issue of the CPI which is scheduled for release on 25 January 2017.

In addition, the ABS will, over the coming months and in consultation with users, further consider the terminology for these series with a view to use terms that reflect their primary purpose: measuring the source of consumer inflation. Please provide feedback on series names to prices.statistics@abs.gov.au by 30th November 2016. The ABS Privacy Policy outlines how the ABS will handle your personal information.

Proposed changes to terminology will be communicated to users in advance of implementation. If changes to terminology are to occur, these will be updated as part of the CPI re-weight scheduled for the December quarter 2017.


INTRODUCTION

The CPI Tradables and Non-tradables series, collectively known as the International Trade Exposure series, measure the contribution of domestic (non-tradables) and imported (tradables) inflation to overall household inflation. Identifying the source of household inflation supports the understanding and forecasting of inflation, as well as supporting monetary and fiscal policy decisions.

The International Trade Exposure series classifies ECs as either tradables or non-tradables by assessing the degree to which their prices are affected by domestic developments and international competition. The Tradables and Non-tradables series are available each quarter in table 8 of the CPI publication.

The current classification of CPI ECs as tradables or non-tradables is listed in appendix 1. Of the 87 ECs in the CPI, 40 are classified as non-tradables, and 47 as tradables. Non-tradables contributes approximately 64 per cent of the CPI, while tradables contributes the remaining 36 per cent.

The International Trade Exposure series classification was last updated in 2011 as part of the 16th Series CPI Review. Data from the 2006-07 Input-Output tables were used to classify each of the CPI ECs. Price indexes for these series can be found in Figure 1.

Figure 1 shows over the past ten years tradables inflation increased by around 10 per cent, while non-tradables inflation increased by 40 per cent. The lower production costs of imports and the strength of the Australian dollar has reduced the prices of imports and resulted in a smaller increase in the Tradables series, while growth in domestic wages and changes in administered taxes has contributed to the larger increase in the Non-tradables series.

Tradables and non-tradables index numbers: Australia - (Jun-2006=100.0)
Graph: Tradables and non-tradables index numbers: Australia—(Jun–2006=100.0)



CONCEPT

The CPI International Trade Exposure series measures the contributions of domestic (non-tradables) and imported (tradables) inflation to household inflation.

The CPI is a measure of price change. Ideally, therefore, the classification of CPI ECs as tradables or non-tradables would be determined by assessing the contribution of the domestic and imported impacts to the overall price change (rather than the contribution to the price level) (footnote 1) . However, in practice, this approach is difficult to implement.

Data limitations affect the ability to quantify the impact of domestic and international forces on the price change. Therefore, the predominant method used to assist in the classification of CPI ECs relies on the internationally traded contributions on the price level of each CPI EC. Put simply, the classification between tradables and non-tradables distinguishes ECs by the degree to which their prices are affected by domestic developments and international competition. Additional analysis is also conducted to determine the final classification.


METHOD AND DATA SOURCES

Three steps were used to classify the CPI ECs as either tradables or non-tradables:
      1. Assess the level of imports and exports to determine a 'default' classification;
      2. Utilise supplementary data to determine the appropriateness of the default classification; and
      3. Analyse the contribution of domestic taxes and subsides.


Step 1: Assess the level of imports and exports

The ratio of imports and exports to Australian production for each EC was calculated and compared against a threshold. If this threshold was exceeded, either by imports, exports or both, then the EC was classified (by default) as tradable.

Data on imports, exports and Australian production were sourced from the 2013-14 Input-Output tables (cat. no. 5209.0.55.001). These data were adjusted to exclude expenditure by international tourists. Data from the 2013-14 Tourism Satellite Account (cat. no. 5249.0) was used to exclude expenditure by international tourists from the data in the Input-Output (I-O) tables. These data were then mapped from the I-O product classification to the CPI Commodity Classification.


Step 2: Utilise supplementary data

The use of a threshold in step 1 provided a 'rule of thumb' in an attempt to simply and transparently classify each of the CPI ECs. However, it was also important to assess the appropriateness of each EC’s classification from a consumer price change perspective.

An assessment of the appropriateness of the classification of each EC using the threshold approach was conducted, particularly for those ECs which were close to the threshold. The threshold approach was supplemented by information on correlations with exchange rates, supporting trade data, significant world events and the regulatory environment within which prices are set.


Step 3: Analyse the contribution of domestic taxes and subsides

Changes to taxes and subsidies are a domestic contribution to inflation. Therefore, the contribution of taxes and subsidies on the price paid by consumers was estimated to determine the classification of ECs as either tradables or non-tradables. Data from the 2013-14 Input-Output tables were used to determine the contribution of taxes and subsidies to final demand (footnote 2) . Where taxes and subsides make a large contribution to the prices paid by consumers on products within an EC, these ECs were classified as non-tradables.


RESULTS

For step 1, a number of thresholds were tested to identify the optimal level where the classification of ECs as tradables was deemed appropriate. At a threshold value of ten per cent, 53 ECs were considered tradables, which is comparable to the 47 that are currently classified as tradables. The ECs that were considered non-tradables at this threshold were found to largely consist of services, with only a handful of goods.

Based on this analysis, a ten per cent threshold was determined as the optimal level of international exposure for classifying the ECs as tradables or non-tradables.

Using the ten per cent threshold, the default classification showed six ECs changing classification from non-tradables to tradables:
  • Waters, soft drinks and juices;
  • Beer;
  • Gas and other household fuels;
  • Therapeutic appliances and equipment;
  • Telecommunication equipment and services;
  • Domestic holiday travel and accommodation.

In the case of Waters, soft drinks and juices, Gas and other household fuels and Therapeutic appliances and equipment, there was ample evidence that the prices of products within these ECs being influenced by international competition. As part of the 2011 review it was decided to classify Gas and other household fuels as non-tradable due to the prices being highly regulated. However, more recently, the price of gas has become increasingly exposed to international competition, coinciding with a surge in liquefied natural gas exports. As a result, Gas and other household fuels will change classification from non-tradable to tradable.

Step 2 involved using supplementary data, which showed that there was a strong case to leave the classification of Telecommunication equipment and services and Domestic holiday travel and accommodation as non-tradables. In the case of Telecommunication equipment and services, imports are predominately mobile phone handsets, which are commonly bundled together with other products, most of which are services and considered non-tradable. For Domestic holiday travel and accommodation, prices are largely unaffected by international competition. Although a significant proportion of Domestic holiday travel and accommodation are exports, the range of services is something that cannot be met by producers in another country.

Further analysis of two ECs: Breakfast cereals and Newspapers, magazines and stationery, were added to the list of changes, with both ECs being close to the ten per cent threshold.

In analysing taxes and subsides data, step 3 saw three ECs re-classified from tradables to non-tradables: Spirits, Tobacco, and Pharmaceutical products, while the Beer EC has remained as non-tradable. Any changes to the taxes or subsidies to the products within these ECs will be reflected as a domestic impact and captured in the non-tradables series.

As a result of this review, a list of the ECs changing classification is shown in table 1. In all, there are five ECs changing from non-tradables to tradables, and three ECs changing from tradables to non-tradables.

Table 1: Expenditure classes changing status

CPI expenditure class Current classification New classification

Breakfast cereals Non-tradables Tradables
Waters, soft drinks and juices Non-tradables Tradables
Gas and other household fuels Non-tradables Tradables
Therapeutic appliances and equipment Non-tradables Tradables
Newspapers, magazines and stationery Non-tradables Tradables
Spirits Tradables Non-tradables
Tobacco Tradables Non-tradables
Pharmaceutical products Tradables Non-tradables




SUMMARY

It is important to regularly review and update the International Trade Exposure series as the Australian economy’s exposure to international competition changes over time. While the fundamental concern of this analysis was the source (domestic or imported) of inflation, the method used in this analysis focused on the price level rather than the price change. A ten per cent threshold was assessed and deemed an appropriate level of exposure to international competition to be classified as tradable.

The ten per cent threshold was used as a rule of thumb to classify the CPI ECs as either tradables or non-tradables. Further analysis using supplementary data, and an assessment of the contribution of domestic taxes and subsides was conducted to ensure the appropriateness of each EC's classification. The end result was five ECs changing classification from non-tradables to tradables, and three ECs changing classification from tradables to non-tradables.

Appendix 1: Current classification of tradables and non-tradables

Tradables component
Non-tradables component

Food and non-alcoholic beverages
Cakes and biscuits; Other cereal products; Beef and veal; Pork; Lamb and goat; Other meats; Fish and other seafood; Cheese; Ice cream and other dairy products; Fruit; Vegetables; Jams, honey and spreads; Food additives and condiments; Oils and fats; Snacks and confectionery; Other food products n.e.c.; Coffee, tea and cocoa. Bread; Breakfast cereals; Poultry; Milk; Eggs; Waters, soft drinks and juices; Restaurant meals; Take away and fast foods.
Alcohol and tobacco
Spirits; Wine; Tobacco. Beer.
Clothing and footwear
Garments for men; Garments for women; Garments for infants and children; Footwear for men; Footwear for women; Footwear for infants and children; Accessories. Cleaning, repair and hire of clothing and footwear.
Housing
Rents; New dwelling purchase by owner-occupiers; Maintenance and repair of the dwelling; Property rates and charges; Water and sewerage; Electricity; Gas and other household fuels.
Furnishings, household equipment and services
Furniture; Carpets and other floor coverings; Household textiles; Major household appliances; Small electric household appliances; Glassware, tableware and household utensils; Tools and equipment for house and garden; Cleaning and maintenance products; Personal care products; Other non-durable household products. Child care; Hairdressing and personal grooming services; Other household services.
Health
Pharmaceutical products. Therapeutic appliances and equipment; Medical and hospital services; Dental services.
Transport
Motor vehicles; Spare parts and accessories for motor vehicles; Automotive fuel. Maintenance and repair of motor vehicles; Other services in respect of motor vehicles; Urban transport fares.
Communication
Postal services; Telecommunication equipment and services.
Recreation and culture
Audio, visual and computing equipment; Audio, visual and computing media and services; Books; International holiday travel and accommodation; Equipment for sports, camping and open-air recreation; Games, toys and hobbies. Newspapers, magazines and stationery; Domestic holiday travel and accommodation; Veterinary and other services for pets; Sports participation; Other recreational, sporting and cultural services; Pets and related products.
Education
Preschool and primary education; Secondary education; Tertiary education.
Insurance and financial services
Insurance; Deposit and loan facilities (direct charges); Other financial services.



1 These two perspectives can result in the same EC being classified differently. An obvious example of this is tobacco. Tobacco is largely imported, and therefore assessing its price level one would classify it as tradable. However, the price change of tobacco is predominantly due to changes in the domestic taxes on tobacco (e.g. the federal excise tax), which on this basis would see it classified as non-tradable. <back
2 For the contribution of taxes, the purchasers' price was used. This is the amount paid by the purchaser, excluding any deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. The purchaser’s price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place. Australian System of National Accounts, 2014-15 (cat. no. 5204.0) <back