CHAPTER 14 THE SYSTEM OF PRICE STATISTICS


INTRODUCTION

14.1 The objective of this final chapter is to help improve users’ knowledge and understanding of the array of Australian price statistics, and to facilitate the selection of the most appropriate measures for particular applications, such as the analysis of inflation, indexation, and business contract adjustment.

14.2 The Consumer Price Index (CPI) is part of a broader system of price statistics. There are a range of other price indexes that apply to different sectors of the economy. This chapter describes the other price measures produced by the ABS, both the direct measures of price change, and derived measures.


PRINCIPAL PRICE INDEXES

14.3 There are six principal price indexes in the system of economic statistics:

(i) Consumer Price Index;

(ii) Producer Price Indexes;

(iii) Import Price Index;

(iv) Export Price Index;

(v) House Price Index; and

(vi) Labour Price Index.

14.4 These are well known and closely watched indicators of macroeconomic performance and the purchasing power of money, and they are used as deflators in providing summary measures of the volume of goods and services produced and consumed. Consequently, these indexes are not only important tools in the design and conduct of the monetary and fiscal policy of the government, but also are of great utility in economic decisions throughout the private sector. These price indexes provide an integrated and consistent view of price developments in production, consumption, and international transactions in goods and services.


DIRECT MEASURES OF PRICE CHANGE

14.5 All the principal price indexes introduced above are direct measures of price change; that is, they are obtained through collecting and directly using price data. Each of the indexes is described in the following paragraphs.

14.6 Consumer Price Index (CPI) measures quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by Australian metropolitan households.

14.7 Producer Price Indexes (PPIs) measure the changes in the prices of goods and services as they either leave the place of production or enter the production process. PPIs can be constructed as either an output measure or an input measure. Input PPIs measure the rate of change in the prices of goods and services purchased by the producer. Output PPIs measure the rate of change in the prices of goods and services as they leave the producer.

14.8 The ABS compiles a suite of quarterly input and output price indexes for selected industries of the Australian economy. As well as indexes relating to narrowly defined components of the economy (such as the materials used in house building), broadly based indexes are produced that cover significant parts of the economy. In particular, the Stage of Production price indexes cover the measured economy for each of the three stages of production (preliminary, intermediate, and final commodities). These measures show both the changes in the prices that producers receive for their outputs, as well as the changes in prices that producers pay for their material inputs. The following indexes are the major PPIs released by the ABS:

• Stage of Production (SOP) Producer Price Indexes - presented by stage of production, industry of origin and destination within the economy;
• Articles produced by manufacturing industries (APMI);
• Materials used in manufacturing industries (MUMI);
• Selected output of division E - Construction;
• Materials used in house building;
• Materials used in coal mining;
• Selected output of division I - Transport, postal and warehousing;
• Selected output of divisions J - Information media and telecommunications, O - Public administration and safety, and S - Other services;
• Selected output of division L - Rental, hiring and real estate services;
• Selected output of division M - Professional, scientific and technical services;
• Selected output of division N - Administrative and support services;
• Metallic materials used in the fabricated metal products industry;
• Copper materials used in the manufacture of electrical equipment; and
• Asphalt supplied and placed.

14.9 The PPIs are published quarterly in Producer Prices Indexes, Australia (cat. no. 6427.0).

14.10 Import Price Index (IPI) measures the changes in the prices paid for imports of merchandise that are landed in Australia each quarter.

14.11 Export Price Index (EPI) measures the changes in the prices received for exports of merchandise that are shipped from Australia each quarter.

14.12 The IPI and EPI are published quarterly in International Trade Price Indexes, Australia (cat. no. 6457.0).

14.13 House Price Index (HPI) measures changes in house prices in each of the eight capital cities. The information is presented in the form of price indexes constructed separately for established houses and for project homes. The price index for established houses covers transactions in detached residential dwellings on their own block of land regardless of age. Project homes are dwellings available for construction on an existing block of land, therefore price changes relate only to the price of the dwelling. The index for project homes is compiled for use after sourcing house purchase expenditure data from CPI. The index for established houses, although not contributing to the CPI, is compiled and published along with the project homes index in recognition of the widespread interest in information specifically relating to housing prices.

14.14 The valuation basis of the HPI is purchasers’ prices, that is the price includes non-deductible taxes (for example GST in the case of project homes). The HPI is published quarterly in House Price Indexes, Eight Capital Cities (cat. no. 6416.0).

14.15 Labour Price Index (LPI) measures changes in the price of labour services resulting from market pressures, and is unaffected by changes in the quality and quantity of work performed. Wages and salaries account for the majority of expenditure on labour costs, and an index of wage prices is published quarterly. Non-wage costs (such as superannuation, workers’ compensation, payroll tax and paid leave) cover the remaining part of labour costs and non-wage price indexes are created for each of these components. Two labour price indexes (one including bonuses and one excluding them) are constructed from the individual wage and non-wage components.

14.16 As the LPI relates to labour costs incurred by employers in both the private and public sectors, the valuation basis for the LPI is purchasers’ prices. Employers primarily engaged in agriculture, forestry and fishing are outside the scope of the LPI.

14.17 The LPI is published quarterly in Labour Price Index, Australia (cat. no. 6345.0).


DERIVED MEASURES OF PRICE CHANGE

National accounts price indexes

14.18 The Australian System of National Accounts, produced by the ABS, is a systematic framework of statistics providing a wide range of information about the economy and its components. Within the National Accounts framework are derived measures of price change which include implicit price deflators (IPDs), and chain price indexes.

14.19 IPDs are obtained by dividing a current price value by the chain volume measure expressed in dollar terms. IPDs are derived measures (hence the term implicit) and are not normally the direct measures of price change by which current price estimates are converted to volume measures. They reflect both changes in the prices between the two periods and changes in the composition of the aggregate between those periods.

14.20 Because the composition of an aggregate often changes from period to period, IPDs do not compare the price of a constant basket of goods and services between any two periods (except in comparing the index reference period with any other period). IPDs calculated from quarterly aggregates may be particularly affected by changes in the physical composition of those aggregates. As much of the quarter to quarter change in the physical composition is of a seasonal nature, IPDs derived from seasonally adjusted data are normally more reliable measures of price change than those calculated from unadjusted data. Even so, seasonally adjusting the series may not completely eliminate the effect of seasonal changes on the derived IPDs.

14.21 IPDs are available for gross domestic product; exports of goods and services; imports of goods and services; and domestic final demand, and its four major components. They are published quarterly as part of Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0), and Balance of Payments and International Investment Position, Australia (cat. no. 5302.0).

14.22 In contrast, the chain price indexes in the Australian National Accounts provide estimates of pure price change. They are annually re-weighted chain Laspeyres price indexes. These indexes encompass the whole of the economy. The chain price index most akin to the CPI is the index for Household Final Consumption Expenditure (HFCE). The main differences between the two are that the chain price index for HFCE is re-weighted annually, and is broader in scope encompassing expenditure by all resident households and non-profit institutions serving households. For example, HFCE includes an estimate of expenditure on gambling, which is not included in the CPI, and it imputes rental payments for owner occupiers.

14.23 An annually chained price index weights price changes together using the previous year's weights for each quarter of the current year. The chain price indexes are calculated from the deflators used to derive the volume estimates, weighted together in the same way and at the same level of detail as the chain volume estimates. In those cases where quantity revaluation is used to derive volume estimates, the implicit price deflator at a detailed level of disaggregation is used in constructing the chain price indexes to minimise the effect of any compositional change.


LIVING COST INDEXES

14.24 The ABS also produces a set of quarterly living cost indexes to assess the effect of changes in prices on the out-of-pocket living expenses experienced by four different types of Australian households categorised based on the principal source of household income, derived from the latest HES.

14.25 The household types in the scope of these indexes account for just over 90% of Australian households. The four household types that have been identified as being appropriate for the construction of these indexes, are:

• employee households - those households whose principal source of income is from wages and salaries;
• age pensioner households - those households whose principal source of income is the age pension or veterans affairs pension;
• other government transfer recipient households - those households whose principal source of income is a government pension or benefit other than the age pension or veterans affairs pension; and
• self-funded retiree households - those households whose principal source of income is superannuation or property income and where the HES defined reference person is ‘retired’ (not in the labour force and over 55 years of age).

14.26 A living cost index is conceptually different from a price index as it reflects changes over time in the purchasing power of the after-tax incomes of households. It measures the impact of changes in prices on the out-of-pocket expenses incurred by households to gain access to a fixed basket of consumer goods and services. The CPI, on the other hand, is designed to measure price inflation for the household sector as a whole and is not the conceptually ideal measure for assessing the changes in the purchasing power of the disposable incomes of the households. The living cost indexes produced by the ABS are constructed using the outlays approach as opposed to CPI which has been using the acquisition approach since the September quarter 1998. For more information, refer to chapter 2 or the publications below.

14.27 The Pensioner and Beneficiary Living Cost Indexes (cat. no. 6467.0) provides an index for age pensioners and other government transfer recipient households whose principal source of income is government benefits.

14.28 The Analytical Living Cost Indexes for Selected Australian Household Types (cat. no. 6463.0), provides indexes for the four individual population subgroups.


WHICH PRICE SERIES SHOULD I USE?

14.29 As described in this chapter, there are a wide range of price indexes produced by the ABS which are used for indexation, research and analysis. Although the ABS acknowledges that the various price indexes it publishes are used in indexation clauses, it neither endorses nor discourages such use. The ABS has prepared information for users that sets out a range of issues that should be taken into account by parties considering an indexation clause in a contract using an ABS published price index. This paper Use of Price Indexes in Contracts is available on the ABS website and in appendix 5 of this publication.

14.30 The index or indexes selected will affect the price change recorded and should be chosen carefully to best represent the set of items. A description of what each price index measures is available on the ABS website which will assist in the decision of which index to use. For more information about what data is available, please contact the ABS National Information and Referral Service on 1300 135 070.