1301.0 - Year Book Australia, 2005  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 21/01/2005   
   Page tools: Print Print Page

Price impacts on the living costs of selected Australian household types

During the course of the review of the Consumer Price Index (CPI) in 1997, it became clear that the principal requirement of the CPI had moved away from an input to wage and salary determination processes to a general measure of price inflation. Accordingly, commencing with the September quarter 1998, the CPI has been designed specifically to measure price inflation for the household sector as a whole. During the review consultations leading up to the decision to alter the design objective of the CPI, various users argued that there was a need for analytical indexes specifically designed to measure changes in living costs for a range of population subgroups.

Using the principal source of household income to categorise households, the four household types for which these indexes have been constructed are:

  • Employee households (i.e. those households whose principal source of income is from wages and salaries).
  • Age pensioner households (i.e. those households whose principal source of income is the age pension or veterans' affairs pension).
  • Other government transfer recipient households (i.e. those households whose principal source of income is a government pension or benefit other than the age pension or veterans' affairs pension).
  • Self-funded retiree households (i.e. those households whose principal source of income is superannuation or property income and where the Household Expenditure Survey (HES) defined reference person is 'retired' (not in the labour force and over 55 years of age)).

The indexes have been constructed to cover the period from June quarter 1998 up to and including the June quarter 2004.

The estimated number of households in each of these household types and their relative significance based on the 1998-99 HES is shown in table 28.7.


28.7 POPULATION SUBGROUPS
Households
Share of total
Household type
'000
%
Employee
4,042.0
56.7
Age pensioner
1,035.4
14.5
Other government transfer recipient
958.1
13.5
Self-funded retiree
361.1
5.1
Other households(a)
726.3
10.2
Total
7,122.8
100.0
(a) Includes self employed, income indeterminate and parent supported students.

Source: ABS data available on request, Household Expenditure Survey, 1998-99.


These 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 or not the disposable incomes of households have kept pace with price changes. The CPI, on the other hand, is designed specifically 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.

Background and methodology

The differences between indexes designed to measure price inflation and indexes designed to measure changes in living costs lie only in the item coverage. The items included in the living cost indexes are determined by reference to all the amounts actually paid by households to gain access to consumer goods and services, while the item coverage of inflation indexes is defined as all those goods and services actually acquired by households in monetary transactions.

The most notable differences are that living cost indexes include interest charges but do not include house purchases, while inflation indexes do not include interest charges but do 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 (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.

For more detail on the methodology used to construct these indexes, see 'Analytical indexes measuring the price impacts on the living costs of selected Australian household types', Year Book Australia 2002.

Results

The index series and quarterly percentage changes for the various household types from June quarter 1998 to June quarter 2004 are shown in graphs 28.8 and 28.9 respectively. The average annual indexes and percentage changes are shown in table 28.10.

Between 2002-03 and 2003-04, changes in living costs were similar across the population subgroups ranging from a low of 2.2% for self-funded retiree households to a high of 2.8% for employee households. The CPI rose by 2.4% over the same period. This contrasts with the range of changes between 2001-02 and 2002-03 when other government transfer recipient households showed the lowest increase (3.1%) and self-funded retiree households showed the highest increase (3.3%), while the CPI rose by 3.1%.

Between 1998-99 and 2003-04 the increases in the population subgroup indexes ranged from 17.2% for self-funded retiree households to 17.9% for age pensioner households. The increase in the CPI over the same period was 17.8%.

Graph 28.8: INDEX NUMBERS(a), By household type


Graph 28.9: INDEX NUMBER CHANGE FROM PREVIOUS QUARTER, By household type

28.10 POPULATION SUBGROUP INDEXES AND PERCENTAGE CHANGES(a)
Employee
Age
pensioner
Other government transfer recipient
Self-funded
retiree
CPI(b)(c)
INDEX NUMBER(c)
1998-99
100.5
100.9
100.9
100.4
100.7
1999-2000
102.6
103.0
103.4
102.2
103.1
2000-01(d)
109.0
109.1
109.5
108.1
109.3
2001-02
111.3
112.7
112.4
111.5
112.4
2002-03
114.9
116.3
115.9
115.2
115.9
2003-04
118.1
119.0
118.6
117.7
118.6
CHANGE FROM PREVIOUS YEAR (%)
1998-99
n.a.
n.a.
n.a.
n.a.
1.2
1999-2000
2.1
2.1
2.5
1.8
2.4
2000-01(d)
6.2
5.9
5.9
5.8
6.0
2001-02
2.1
3.3
2.6
3.1
2.9
2002-03
3.2
3.2
3.1
3.3
3.1
2003-04
2.8
2.3
2.3
2.2
2.4
(a) Reference base is June quarter 1998 = 100.0.
(b) The CPI has been re-referenced from 1989-90 = 100.0 to June quarter 1998 = 100.0 for ease of comparison with the population subgroup indexes.
(c) The CPI is designed to measure price inflation for the household sector and not changes in living costs.
(d) The 2000-01 data were affected by the introduction of The New Tax System, in particular, the introduction of the Goods and Services Tax from 1 July 2000.

Source: ABS data available on request, derived from selected CPI expenditure weights and price movements.


Conclusions

These analytical indexes have been designed specifically 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?
The key issues these indexes can address are whether price changes result in different household types experiencing significantly different changes in their aggregate living costs and whether the CPI is an adequate proxy for changes in living costs.

In previous studies it was concluded that changes in living costs had been broadly similar across the different household types. The extension of the analysis to June quarter 2004 is generally consistent with those earlier conclusions, although perceptions as to what are significant differences may vary between analysts. Further, it could be argued that the CPI provides a reasonable estimate of changes in living costs for each of the selected household types over this period.

These indexes have been constructed to reflect the experiences of population groups as a whole and not the experiences of any individual household. In this regard it is particularly important to note that the indexes do not reflect the changes in living costs experienced by households as a direct consequence of their moving through the life cycle (e.g. as a result of family formation and ageing). Furthermore, these indexes have been designed to provide a general measure of changes in living costs for each of the population subgroups; they do not measure changes in the relative standard of living of different population subgroups.