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The 13th series CPI has been specifically designed as a general measure of price inflation for the household sector as a whole. The CPI measures the changes in the price of a fixed basket of goods and services acquired by household consumers.

CPI measures price change of a fixed basket of goods and services

The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items typically bought by Australian households. Now imagine the basket is purchased each quarter. As prices change from one quarter to the next, so too will the total price of the basket. The CPI is simply a measure of the changes in the price of this fixed basket as the prices of items in it change.

CPI reference population is all metropolitan private households

The CPI measures price changes relating to the spending pattern of all metropolitan private households. This group is termed ‘the CPI population group’, and includes a wide variety of subgroups such as wage and salary earners, the self-employed, age pensioners, and social welfare beneficiaries. The term ‘metropolitan’ means the six State capital cities, Darwin and Canberra. The current CPI population group represents about 64% of all Australian private households.

Ideally the CPI population group should encompass all Australian households, but this is not possible due to the substantial additional resources required to collect prices outside the capital cities. ABS research has shown that, in general, price movements (as opposed to price levels) are similar across regions.

Base period index number is 100.0

The price of the CPI basket in the reference base period is expressed as an index by assigning it 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 35% since the base year, then the index would be 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.

CPI does not measure price levels

It is important to remember that the CPI measures price movements (i.e. percentage changes) and not actual price levels (dollar amounts). For instance, the index for Beef and veal of 104.3 and for Pork of 110.7 in the September quarter 1998 does not mean that pork is more expensive than beef. It simply means that the price of pork has increased at a little over twice the rate of the price of beef since the base period.

CPI not a purchasing power or cost-of-living measure

Although the CPI is also commonly referred to as a measure of changes in purchasing power or a cost-of-living index, in an economic context, these terms are not strictly interchangeable with a measure of price inflation. Their measurement would require separate, purpose built indexes. A single index cannot be expected to adequately fulfil all these roles.

An index designed to measure changes in the purchasing power of household incomes would need to be concerned with changes in the costs of all expenditures made from household income. Such a measure would include items like income tax and interest payments.

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 when faced with changing market conditions (for instance, buying chicken rather than beef when beef prices are high).

The CPI on the other hand is constructed by reference to a basket consisting only of actual goods and services acquired by households. Further, as the composition of this basket is held fixed from period to period, it cannot accurately reflect changing consumer preferences and substitutions made in response to changes in relative prices.