EXPLANATORY NOTES


OVERVIEW OF THE ANALYTICAL LIVING COST INDEXES

1 The Analytical Living Cost Indexes (ALCIs) have been compiled and published by the ABS since June 2000. In recognition of the widespread interest in the extent to which the impact of price change varies across different subgroups of the Australian population, the ALCIs have been published quarterly from the September quarter 2009.

2 The ALCIs are produced as a by-product of the Consumer Price Index (CPI) and are the conceptually preferred measures for assessing the effect of changes in prices on the out-of-pocket living expenses experienced by four types of Australian households.

3 Households have been categorised based on the principal source of household income, derived from the 2009-10 Household Expenditure Survey (HES). The four household types in the scope of the HES 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 (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) and,
• self-funded retiree households (i.e. 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)).

MAIN CONCEPTUAL DIFFERENCES FROM THE CPI

4 A living cost index 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 Australian Consumer Price Index (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 households.

5 There are a number of ways to construct a price index for households with at least three widely accepted approaches used by national statistical agencies:

• Acquisitions method: changes in the prices of goods and services acquired (actually received)
• Cost of use method: changes in the prices of goods and services used (consumed)
• Outlays method: changes in the prices of goods or services for which payments were made to gain access to goods and services.

6 From the September quarter 1998, the CPI has been constructed using the acquisitions method. The ALCIs have been constructed using the outlays approach.

7 The item coverage of a living cost index is determined by reference to the actual money outlays of households on all but investment items.

8 In practice, for most goods and services purchased by the reference population, outlays and acquisition occur within a relatively short space of time. There are three areas of expenditure in which these conceptual approaches provide significantly different results:

• purchase of dwellings
• purchase of durable items
• financial services and the use of credit.

9 Under the acquisitions approach used in the CPI, the net purchase of housing and the increase in volume of housing due to renovations and extensions and other costs (e.g. maintenance costs and council rates) are included for owner-occupied housing. Changes in rental are measured for that part of the reference population that resides in rented dwellings. The CPI does not include interest paid on mortgages.

10 Under the outlays approach used in the ALCIs, the changes in the amount of interest paid on mortgages (measured as part of financial and insurance services) and other costs (e.g. maintenance costs and council rates) are included for owner-occupied housing. In addition, changes in rental are measured for that part of the reference population that resides in rented dwellings. The ALCIs do not include the net purchase of housing and the increase in volume of housing due to renovations or extensions.

11 Insurance (other than health insurance) is treated differently in the ALCIs. Under the acquisitions approach, the weight for insurance in the CPI relates to the value of the service provided by the insurance company. In simple terms, this represents the amount of premiums paid by households less the amounts reimbursed by way of claims. Under the outlays approach used in the ALCIs, the weight relates to the gross value of insurance premiums paid by households.

12 Financial services are treated differently in the ALCIs. Mortgage interest and consumer credit charges are included in the ALCIs. However other financial services (i.e. deposit and loan facilities (direct charges) and other financial services) are not included.

13 The ALCIs will continue to be published at the national level only.


METHODOLOGY

14 Construction of the ALCIs was undertaken in three stages. Stage one was concerned with calculating weights representative of the expenditure patterns of the defined household types, derived mainly from the 2009-10 HES. Stage two involved identifying appropriate measures of price change for each of the expenditure weights. The third and final stage was to use the weights to aggregate or average the price change measures.

15 From the September quarter 2011, the expenditure weights for employee households, age pensioner households and other government transfer recipient households changed from using state/territory expenditures to capital city level expenditures, consistent with the approach used for the CPI. The 2009-10 HES included additional sampling of age pensioner and other government transfer recipient households. Analysis of the results of the 2009-10 HES showed that the expenditure weights at the capital city level were sufficiently reliable for all household types with the exception of self-funded retiree households, thus improving the alignment and scope of the price collection and expenditure estimates leading to improved overall estimates.

16 The expenditure weights for self-funded retiree households was retained at the state/territory level. ALCIs for all four population subgroups are published as totals for Australia only. The ALCIs weighting patterns from the September quarter 2011 is available in the downloads tab in Analytical Living Cost Indexes and Pensioner and Beneficiary Living Cost Index: 16th Series Weighting Patterns, 2011 (cat. no. 6472.0).

17 The measures of price change, with the exception of those for interest charges, were sourced from the CPI. Most item price indexes were constructed by direct reference to the equivalent CPI expenditure class indexes. Expenditure classes are the lowest level at which the expenditure weights are fixed for the duration of an index series.

18 Some item price indexes were constructed by reference to lower level CPI price data. Such exceptions relate to those items where it is known that different household types face different prices, such as subsidised public transport fares and pharmaceuticals for senior citizens.

19 Price measures for interest charges have been collected separately by the ABS on a basis comparable with those employed in the CPI prior to the September quarter 1998.

20 For ease of comparison, the index reference period for the CPI data used throughout this publication has been re-referenced to June quarter 1998 = 100.0. Index numbers and percentage changes are always rounded to one decimal place. The percentage changes are calculated from rounded index numbers. Index numbers for periods longer than a single quarter (e.g. for financial years) are calculated as the simple arithmetic average of the rounded quarterly index numbers. All index numbers and percentage changes shown are calculated on this basis. This may lead to some minor differences (due to rounding) from the figures published in Consumer Price Index, Australia (cat. no. 6401.0).


SERIES LINKS

21 The ALCIs were constructed using four sets of weights. The first set of weights, based on the 1993-94 HES, was used to construct the indexes from the June quarter 1998 to the June quarter 2000. The second set of weights, based on the 1998-99 HES, was used to construct the indexes from the September quarter 2000 to the June quarter 2005. The third set of weights, based on the 2003-04 HES, was used to construct the indexes from the September quarter 2005 to the June quarter 2011. The fourth set of weights, based on the 2009-10 HES, was used to construct the indexes from the September quarter 2011 quarter onwards.


EXPENDITURE PATTERNS OF THE SELECTED HOUSEHOLD TYPES

22 Calculation of the aggregate impact of price changes on each of the household types involves weighting together the price movements recorded for individual goods and services. For each household type, the weight assigned to any particular good or service reflects the proportion of total household expenditure accounted for by expenditure on the item. The ALCIs weekly average household expenditure, weighting patterns and comparison with the previous weighting pattern by household type are available in the downloads tab in Analytical Living Cost Indexes and Pensioner and Beneficiary Living Cost Index: 16th Series Weighting Patterns, 2011 (cat. no. 6472.0).

23 Table 1 shows average weekly expenditure per household during 2009-10 for each of the four household types, at June quarter 2011 prices. The commodity groups correspond to the commodity groups in the current (16th series) CPI.

24 Table 1 illustrates significant differences in expenditures, both in total and at the individual commodity group level across the household types. Although differences in incomes are likely to be a major reason for this, other factors such as the demographic make-up of the households and dwelling tenure would also play a part. For example, age pensioner households have on average the lowest number of persons per household and self-funded retiree households have a higher than average rate of outright home ownership.

25 Table 2 presents the same data in percentage terms, along with the CPI for comparison purposes. It is this expenditure data that produces the expenditure shares or weights that are given to each household type, and to which the price movements are applied.

Table 1: Estimated average weekly expenditure during 2009-10, Household type by Commodity group(a)(b)
	Employee	Age pensioner	Other government transfer recipient	Self-funded retiree	CPI
Commodity Group	$	$	$	$	$
Food and non-alcoholic beverages	262.48	120.72	150.86	176.66	230.87
Alcohol and tobacco	114.63	36.12	75.92	68.16	96.87
Clothing and footwear	64.39	26.31	38.12	43.29	54.58
Housing(c)	205.32	92.43	178.64	113.89	305.75
Furnishings, household equipment and services	142.82	59.81	60.20	119.83	124.79
Health	80.73	47.69	24.32	87.22	72.56
Transport	182.25	50.65	75.65	118.13	158.39
Communication	46.45	19.80	32.62	31.84	41.81
Recreation and culture	194.82	61.91	73.79	215.24	172.30
Education	45.13	1.54	18.45	9.06	43.67
Insurance and financial services(d)	218.75	22.19	52.42	39.40	69.71
All groups	1557.77	539.17	780.99	1022.72	1371.30
Number of households in population subgroup ('000)	3471.60	551.40	561.10	(e)263.90	5351.06
Persons/household (no.)	2.84	1.52	2.57	1.63	2.60
(a) Based on 2009-10 Household Expenditure Survey (HES) at June quarter 2011 prices.
(b) Figures may not add up due to rounding.
(c) House purchases are included in the CPI but excluded from the population subgroup indexes.
(d) Includes interest charges and general insurance. Interest charges are excluded from the CPI and general insurance is calculated on a different basis.
(e) The expenditure weights for self-funded retiree households are based on estimates at the State/Territory level, whereas weights for the other household types (and the CPI) are based on estimates at the capital city level. See paragraphs 15 and 16 of the Explanatory Notes.

Table 2: Expenditure weights, Household type, by commodity group(a)(b)
	Employee	Age pensioner	Other government transfer recipient	Self-funded retiree	CPI
Commodity Group	%	%	%	%	%
Food and non-alcoholic beverages	16.85	22.39	19.32	17.27	16.84
Alcohol and tobacco	7.36	6.70	9.72	6.66	7.06
Clothing and footwear	4.13	4.88	4.88	4.23	3.98
Housing(c)	13.18	17.14	22.87	11.14	22.30
Furnishings, household equipment and services	9.17	11.09	7.71	11.72	9.10
Health	5.18	8.85	3.11	8.53	5.29
Transport	11.70	9.39	9.69	11.55	11.55
Communication	2.98	3.67	4.18	3.11	3.05
Recreation and culture	12.51	11.48	9.45	21.05	12.56
Education	2.90	0.29	2.36	0.89	3.18
Insurance and financial services(d)	14.04	4.12	6.71	3.85	5.08
All groups	100.00	100.00	100.00	100.00	100.00
(a) Based on 2009-10 Household Expenditure Survey (HES) at June quarter 2011 prices.
(b) Figures may not add up due to rounding.
(c) House purchases are included in the CPI but excluded from the population subgroup indexes.
(d) Includes interest charges and general insurance. Interest charges are excluded from the CPI and general insurance is calculated on a different basis.

26 There are some notable differences in the expenditure weights across the household types. For example, the proportion of expenditure allocated to Food and non-alcoholic beverages is highest for age pensioner households. It is also relatively high for other government transfer recipient households. Employee households allocate a higher proportion of their expenditure to Transport, Education and Insurance and financial services (which includes interest charges) than the other household types. Other government transfer recipients allocate higher proportions of their expenditure to Housing, Alcohol and tobacco and Communication than the other household types. Self-funded retiree households have higher relative expenditure on Furnishings, household equipment and services, and Recreation and culture than the other household types. Health costs account for a significantly higher proportion of expenditure of age pensioner and self-funded retiree households than the other household types.