Consumer Price Index

NAME OF ORGANISATION
Australian Bureau of Statistics (ABS)

OVERVIEW
The Consumer Price Index (CPI) is a measure of changes, over time, in retail prices of a constant basket of goods and services representative of consumption expenditure by resident households in Australian metropolitan areas.

The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items typically acquired by Australian households. As prices vary, the total price of this basket will also vary. The CPI is simply a measure of the changes in the price of this basket as the prices of items in it change.

The CPI measures price changes relating to the spending pattern of metropolitan private households. This group is termed the CPI population group. 'Metropolitan' is defined as the State capital cities, together with Darwin and Canberra.

The price of the CPI basket in the base period is assigned a value of 100.0 and the prices in other periods are expressed as percentages of the price in the base period. For example, if the price of the basket had increased by 35% since the base year, then the index would read 135.0. Similarly, if the price had fallen by 5% since the base year, the index would stand at 95.0. The current reference base period for the CPI is 1989–90.

For practical reasons, the CPI basket cannot include every item bought by households, but it does include all the important kinds of items. It is not necessary to include every item that people buy since many related items are subject to similar price changes. The idea is to select representative items so that the index reflects price changes for a much wider range of goods and services than is actually priced.

The total basket is divided into a number of major commodity groups, subgroups and expenditure classes. It covers items such as food, alcohol and tobacco, clothing and footwear, housing, household contents and services, health, transportation, communication, recreation, education and financial and insurance services.

Indexes are compiled and published for each of the groups, subgroups and expenditure classes for each State capital city, Darwin and Canberra. National indexes are constructed as the weighted average of the indexes for each of the eight capital cities.

Further information about the CPI is contained in the booklet A Guide to the Consumer Price Index, 15th Series (cat. no. 6440.0) and Australian Consumer Price Index, Concepts, Sources and Methods (cat. no. 6461.0).

PURPOSE
The CPI has been an important economic indicator for many years and actions related to movements in it have had direct or indirect effects on all Australians. It is now provides a general measure of price inflation for the household sector as a whole and is used by the Reserve Bank of Australia as the official measure of inflation for evaluating monetary policy. In the past it has been used as a starting point by parties to the national wage hearings and by the Industrial Relations Commission in determining the size and nature of wage adjustments. The CPI has also been used in recent years in the indexation of pension and superannuation payments (that is, the pension or payment is automatically adjusted, or 'indexed', using movements in the CPI). Many business contracts are regularly adjusted to take account of changes on the CPI or in some components of it. Rental agreements, insurance coverages and child support payments are frequently tied in some manner to changes in the CPI.

SCOPE
Scope: The scope of the CPI includes all consumption goods and services purchased by resident households in metropolitan areas.

Coverage: As it is not possible to observe all transactions, prices are collected from samples of goods and services and outlets. Approximately 100,000 price quotations are collected each quarter across the eight capital cities. The items included in the sample are determined after considering many factors, such as the level of expenditure on the expenditure class, the level of homogeneity of items in the expenditure class, the extent to which items in the expenditure class are subject to different forces affecting their price and the ability to clearly define and measure the price of the item. Similarly, the range of outlets included depends on their relative market share for the item.

For a broad overview of the 15th Series CPI, how to use the CPI, and how the CPI is calculated, refer to A Guide to the Consumer Price, 15th Series (ABS Cat. no. 6440.0).

DATA DETAIL

Conceptual framework
The CPI is constructed in accordance with principles set out by the International Labour Organisation (ILO) in the publication Consumer Price Indices; An ILO Manual, by Ralph Turvey et al (ILO, Geneva 1989). In particular Austarlia is a signatory to the agreement included as an appendix to this publication.

The CPI measures the change in the cost of purchasing a fixed basket of goods and services. The basket represents the purchases made by a particular population group in a specified period.

The basket of goods and services used in the CPI is chosen to represent the spending pattern of all private households in metropolitan areas.

Metropolitan consists of the Statistical Divisions (currently as defined for the Census of Population and Housing) for the eight capital cities of the States and Territories - Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Canberra and Darwin.

No CPI is compiled for Australia as such. For general statistical purposes the equivalent of an all-Australia index is the series for the weighted average of the eight capital cities.

The CPI relates to all expenditure by Australian resident households in its population group regardless of whether that expenditure is made in Australia or overseas. Conversely, the CPI does not, in concept, relate to expenditure in Australia by non-resident households (ie, conceptually it excludes expenditure by foreign visitors and foreign diplomatic representatives in Australia).

Taking into account the definitions added in the paragraphs above, a more comprehensive formal description of the Australian CPI therefore is: a measure of changes, over time, in retail prices of a constant basket of goods and services representative of consumption expenditure by resident households in Australian metropolitan areas.

In compiling the CPI quarterly, the objective is to measure the change between average price levels during one quarter and average price levels during the next quarter. It does not measure price changes between any one date and any other date, even though this may appear to be so in some cases. Obviously it is not practicable to calculate actual average quarterly price movements for most items. In practice a range of conventional arrangements has to be adopted in order to collect and calculate prices which will approximate, or represent, quarterly average prices - including pricing a number of items at one particular date in each quarter.

The CPI is a measure of pure price change (ie, price change excluding the effects of any change in quality or quantity of the goods or services concerned). The objective is to measure each quarter the change in the cost of purchasing an identical basket of goods and services since the previous quarter. Because, in the real world, the qualities and quantities of goods and services available for consumers to purchase are continually changing, a substantial proportion of the effort of compiling the CPI goes to assessing the effect on prices of these changes and making appropriate adjustments before compiling the CPI.

The CPI is a measure of changes in transaction prices - the prices actually paid by consumers for the goods and services they buy. It is not concerned with nominal, or recommended, or list prices. Again, a considerable amount of CPI price collection work is concerned with establishing actual transaction prices as distinct from recommended or list prices. In some items, such as motor cars and petrol, there can be widespread divergence from list prices through discounting of various kinds; the extent of discounting can vary frequently and rapidly. For these reasons the average price movements ultimately reflected in the CPI between one quarter and the next often will be substantially different from those perceived by particular people and expected by them to be reflected in the CPI.

The CPI is often loosely called the "cost-of-living index", but strictly speaking this is not correct. A true cost-of-living index, among other things, would need to be concerned with changes in standards of living and with the substitutions that consumers make in order to maintain their standard of living in the face of changing market conditions (for instance, buying chicken rather than beef when beef prices are high). By comparison, the CPI assumes the purchase of a fixed basket of goods and services and measures price changes in that basket alone. So far, no acceptable statistical methodology has been devised which would enable a true cost-of-living index to be compiled.

The CPI measures price change over time and does not provide comparisons between relative price levels at a particular date. For example, it does not tell us whether beef is dearer than lamb, or whether bus fares are dearer than train fares. The fact that the index number for any particular component is higher than that for another component in a particular quarter does not mean that the first component is more expensive than the second - it merely means that, since the reference base year, prices for the first component have risen more than prices for the second component.

Similarly, the CPI does not provide any basis for measuring relative price levels between the different cities. Measures of relative price levels in different localities (spatial price comparisons) are sought by many users - particularly for purposes such as assisting to set relative wage and salary levels, or allowances, subsidies, etc.

The composition and weighting pattern of the CPI relate to the population group as a whole and not to any particular type and size of household. Since no one household is likely to have an expenditure pattern exactly matching the overall pattern of the population group, the CPI numbers are unlikely to reflect exactly the impact of price movements on particular households, or on narrower sub-groups of the population. The appropriateness of applying the CPI to individuals, or sub-groups of the population (eg, in adjusting their income or other money amounts involved in contractual arrangements), will depend among other things on the extent to which their particular expenditure pattern resembles the CPI weighting pattern. The significance of any divergence in the expenditure pattern of that particular individual or group from the average will, of course, depend on the relative dispersion of price movements. If the dispersion happens to be low (ie, all prices are changing at similar rates) the difference in expenditure patterns will be immaterial.

The CPI is a chain of Linked indexes with changes in composition and weighting made every four or five years. Links have been made on a number of occasions - the latest at June quarter 2005. During each period between links the weighting pattern of the CPI remains unchanged. At times of linking the weighting pattern is brought up to date, the composition of the index revised and the new CPI linked to its predecessors to form one continuous series. The linking process involves measuring overall price movement on the basis of one weighting pattern up to the time of the link and on another weighting pattern after the link. This ensures that the resulting continuous series reflects only price variations and not differences in cost of the old and new combinations and lists of items. The introduction of new items and weights by linking does not, of itself, raise or lower the level of the index.

Main outputs
Publications Available

Consumer Price Index, Australia (ABS Cat. no. 6401.0)

Average Retail Prices of Selected Items (ABS Cat. no. 6403.0.55.001)


Contents of Publications

6401.0 - Movements in retail prices of goods and services commonly purchased by metropolitan households. The goods and services are divided into the following groups: food; alcohol and tobacco; clothing and footwear; housing; household contents and services; health; transportation; communication; recreation; education; and financial and insurance services. Indexes for each of these groups and for 'All Groups' are published for each of the State capitals along with Canberra and Darwin, and for the weighted average of the eight capital cities. Details are also shown for about 54 sub-groups and special and analytical series, for the weighted average of the eight capital cities.

6403.0.55.001 - Average retail prices of selected items included in the Consumer Price Index for each of the six State capitals, Canberra and Darwin (released as a datacube in EXCEL format.

ABS Website

The current quarter key figures, notes, analyses and comments, Tables 1 and 2 and Explanatory Notes from 6401.0 and a longer term series of All groups quarterly index numbers for the weighted average of eight capital cities dating back to March quarter 1985 are available from the 'Summary' tab of the CPI page on the ABS Website.

A .pdf version of the publication and time series spreadsheets for each of the tables can be downloaded free of charge from the 'Details' tab of the CPI page.

Classifications
Detailed information about the CPI is contained in Australian Consumer Price Index, Concepts, Sources and Methods (cat. no. 6461.0), while a more simplified and condensed version is contained in the booklet A Guide to the Consumer Price Index, 15th Series (cat. no. 6440.0).

Other concepts (summary)
Accrual basis: The concept used in the CPI, whereby price changes are reflected at the time the obligation to pay is incurred - as distinct from when payment is made.

Acquisition approach: The concept whereby the weight of an item in the CPI is based on the value of the goods or services acquired in the weighting base period, regardless of when payment is made.

Basket: Commonly used term for the goods and services priced for the purpose of compiling the CPI.

CPI population group: That sub-set of the Australian population to which the CPI specifically relates, namely metropolitan resident households.

Cost of living index: An index measuring the change in the cost of preserving a particular standard of living. Such an index would take account of changes in the mode of living as well as price changes. The term is frequently, but incorrectly, used to describe the CPI.

Expenditure aggregate: The common unit of measurement which represents the current cost in dollars per household per year of purchasing the same quantity of goods or services as was purchased in the weighting base period. Expenditure aggregates are calculated by applying price movements to base period expenditure weights.

Linking: The technique used to join a new index series (eg one having a changed composition and weighting pattern) to an old index series to form a continuous series. The technique ensures that the resultant linked index reflects only price variations (ie the introduction of the new items and weights does not of itself affect the level of the index).

Pricing to constant quality: The procedure of pricing the same quality and quantity of goods or services in successive periods.

Pure price change: The change in the price of a good or service after removing any variations in price attributable to a change in quantity or quality.

Splicing: A technique for introducing new items or respondents into the index calcuations so that the level of the index is not affected.

GEOGRAPHIC DETAIL
Australia
New South Wales
Victoria
Queensland
South Australia
Western Australia
Tasmania
Northern Territory
ACT
Capital City Statistical Division

Comments and/or Other Regions
Eight capital cities and a weighted average of the eight capital cities only. No regional data.

COLLECTION FREQUENCY
Quarterly

Frequency comments
Prices for more than 2/3 of specifications are collected on a monthly basis, overwhelmingly by direct observation by trained Field Officers.

COLLECTION HISTORY
Retail price indexes have been constructed since 1912 using various indexes composed by measuring different baskets of consumer goods.

Various Retail Price indexes preceded the CPI:

1912-1938 A Series Index, covered only food, groceries and house rents. Main use was for wage adjustment purposes between 1913 and 1933.
1925-1953 B Series Index, designed to replace A Series for statistical purposes but was never used for wage adjustment.
1921-1961 C Series Index, covered food and groceries, house rents (4 and 5 roomed houses), clothing, household drapery, household utensils, fuel, lighting, urban transport fares, smoking and some miscellaneous items. The food and rent component of the C Series Index was the same as the B Series Index. The C Series Index was used for the purposes of wage adjustment from 1934 to 1953. Indexes were compiled for the capital city and four of the larger towns in each of the six States; a weighted average of thirty towns (including capital cities); and three additional towns - Whyalla, Port Augusta and Canberra

1933-34 D Series Index, which was derived by combining the A and C Series Indexes and was compiled especially for wage adjustment purposes.

1954-1960 Interim Retail Price Index, covered a wider range of items than the C Series and was based on post war consumption weights. It was intended to be a transitional index, but to some extent it replaced the C Series Index for general statistical purposes; it was never used for wage adjustment purposes.

The Consumer Price Index was first compiled in 1960. The aim was to compile a series of shorter-term indexes which would be chain linked together to form long-term series, unlike its predecessors which were fixed weights.

The CPI is reviewed and reweighted on a regular basis, normally coinciding with the completion of an ABS Household Expenditure Survey. Weights have been changed in 1963, 1968, 1973, 1974, 1976, 1982, 1987, 1992, 1998, 2000 and 2005.

The CPI was initially confined to the six State capital cities, with Canberra included in the September quarter 1964 and Darwin in the June quarter 1982.

Various items have been added to the CPI basket over the years to mainly reflect changing consumption patterns. The main new areas included in the CPI over the years and the dates when they were first included in the measurement of price movements have been:

September quarter 1952

• private motoring

• television (except for Canberra)

• furniture
• television (for Canberra)

• government flat rents (for Canberra)
• private flat rents (except for Canberra)
• health services

• wine and spirits
• snacks, take-away food
• photographic goods and services
• private house and flat rents (for Canberra)

• holiday travel and accommodation in Australia
• restaurant meals
• fresh fruit and vegetables (other than potatoes and onions)
• fresh and frozen fish
• insurance on dwellings and contents and on motor vehicles
• books, toys, games and sporting equipment

• overseas holiday travel and accommodation
• primary and secondary education fees
• child care fees
• pharmaceutical prescriptions

• mortgage interest charges
• consumer credit charges
• optical services
• veterinary services
• watches and clocks

• house purchase
• domestic services
• home computers
• tertiary education fees

• financial services: deposit and loan facilities and other financial services

• television and radio licence fees

• caravans

• house purchase (note this category was reinstated in September quarter 1998)

• mortgage interest charges
• consumer credit charges