EXPLANATORY NOTES


OVERVIEW OF THE PENSIONER AND BENEFICIARY LIVING COST INDEX

1 The Pensioner and Beneficiary Living Cost Index (PBLCI) is based on the Analytical Living Cost Indexes (ALCIs) which have been compiled and published by the ABS since June 2000. The ALCIs were developed in recognition of the widespread interest in the extent to which the impact of price change varies across different groups in the community. These indexes are produced as a by–product of the Consumer Price Index (CPI). They are the conceptually preferred measures for assessing the effect of changes in prices on the out–of–pocket living expenses of subgroups of the Australian population.

2 Existing ALCIs are prepared for four types of Australian households:

• employee households;
• age pensioner households;
• other government transfer recipient households; and
• self–funded retiree households.

3 The ABS currently publishes these indexes quarterly in Analytical Living Cost Indexes for Selected Australian Household Types (cat. no. 6463.0).

4 The PBLCI is a measure of the effect of changes in prices on the out–of–pocket living expenses experienced by two of these subgroups of the Australian population:

• age pensioner households (i.e. those households whose principal source of income is the age pension or veterans affairs pension) and,
• 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).

5 Households have been categorised based on the principal source of household income, derived from the 2009–10 Household Expenditure Survey (HES).

6 This information is complementary to a more detailed information paper, ABS Information Paper: Introduction of the Pensioner and Beneficiary Living Cost Index, Australia (cat. no. 6466.0).


MAIN CONCEPTUAL DIFFERENCES BETWEEN THE CPI AND THE PBLCI

7 The PBLCI represents the conceptually preferred measure for assessing the impact of changes in prices on the disposable incomes of households whose income is derived principally from government pensions or benefits. In other words, it is particularly suited for assessing whether the disposable incomes of these households have kept pace with price changes. The Australian Consumer Price Index (CPI), on the other hand, is designed 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.

8 There are a number of ways to construct a consumer price index with at least three widely accepted alternative 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

9 A living cost index is intended to be used to assess changes over time in the purchasing power of the after–tax incomes of households. It is therefore concerned with measuring the impact of changes in prices on the out–of–pocket expenses incurred by households to gain access to consumer goods and services. The item coverage of such an index is determined by reference to the actual money outlays of households on all but investment items.

10 From the September quarter 1998, the CPI has been constructed using the acquisitions method. The PBLCI has been constructed using the outlays approach.

11 In practice, for most goods and services purchased by the reference population, outlays and acquisitions 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.

12 Under the acquisitions approach used in the CPI, the net purchase of housing, the increase in volume of housing due to renovations, extensions and other costs (e.g. maintenance costs and council rates) are included for all owner–occupied housing. Changes in rental are measured for that part of the population that resides in rented dwellings. The CPI excludes interest paid on mortgages.

13 Under the outlays approach used in the PBLCI, the changes in the amount of interest paid on mortgages (measured as part of Insurance and financial 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 PBLCI therefore excludes the net purchase of housing and the increase in volume of housing due to renovations or extensions.

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

15 Financial services are treated differently in the PBLCI. The PBLCI includes mortgage interest and consumer credit charges but excludes all other financial services (i.e. deposit and loan facilities (direct charges), and other financial services).

16 The PBLCI will continue to be published at the national level only.


METHODOLOGY

17 Construction of the ALCIs was essentially undertaken in three stages. Stage one was concerned with calculating weights representative of the expenditure patterns of the defined household types. 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.

18 From the September quarter 2011, the measures of price change for the PBLCI, 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. Prior to the September quarter 2011, the PBLCI was derived by combining two existing ALCIs – age pensioner and other government transfer recipients. This change only relates to the internal construction and will not impact on the resulting series.

19 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.

20 The coverage of the expenditure weights for the PBLCI households (age pensioner households and other households whose principal source of income is government benefits) is capital city level expenditures, consistent with the approach used for the CPI. Prior to the September quarter 2011 the PBLCI was derived by combining two existing ALCIs – age pensioner and other government transfer recipients using weights at the state or territory level as previous HES data did not support capital city weighting for these sub populations. The ABS expanded the sample for the 2009–10 HES used in the PBLCI from September quarter 2011 to include more households in the reference population i.e. age pensioner households and other government transfer recipient households.

21 To allow comparison of the Pensioner and Beneficiary Living Cost Index with other ABS price indexes, all index numbers in this publication use a reference base of June quarter 2007 = 100.0. However, percentage changes used in this publication for the Consumer Price Index with a reference base of 1989–90 = 100.0 are as published in Consumer Price Index, Australia (cat. no. 6401.0). The percentage changes for the Analytical Living Cost Indexes used in this publication are as published in Analytical Living Cost Indexes for Selected Australian Household Types (cat. no. 6463.0).


SERIES LINKS

22 The weights of the PBLCI population subgroup was constructed using two sets of weights. The first set of weights, based on the 2003–04 HES at the national level, was used to construct the PBLCI from the June quarter 2007 to the June quarter 2011. The second set of weights, based on the 2009–10 HES at the weighted average of the eight capital cities level, was used to construct the PBLCI from the September quarter 2011 onwards.


EXPENDITURE WEIGHTS

23 Calculation of the aggregate impact of price changes involves weighting together the price movements recorded for individual goods and services. The weight assigned to any particular good or service reflects the proportion of total household expenditure accounted for by expenditure on the item. Further detailed expenditure weights can be found in Analytical Living Cost Indexes and Pensioner and Beneficiary Living Cost Index: 16th Series Weighting Patterns, 2011 (cat. no. 6472.0).

Table 1: Expenditure weights, Household type, by commodity group and estimated average weekly expenditure during 2009–10(a)(b)
	Expenditure weights		Estimated average weekly expenditure
	PBLCI	CPI	PBLCI	CPI
Commodity Group	%	%	$	$
Food and non–alcoholic beverages	20.56	16.84	135.92	230.87
Alcohol and tobacco	8.50	7.06	56.19	96.87
Clothing and footwear	4.88	3.98	32.27	54.58
Housing(c)	20.56	22.30	135.91	305.75
Furnishings, household equipment and services	9.08	9.10	60.00	124.79
Health	5.43	5.29	35.91	72.56
Transport	9.57	11.55	63.26	158.39
Communication	3.97	3.05	26.26	41.81
Recreation and culture	10.27	12.56	67.90	172.30
Education	1.52	3.18	10.07	43.67
Insurance and financial services(d)	5.66	5.08	37.44	69.71
All groups	100.00	100.00	661.13	1371.30
Number of households in population subgroup ('000)			1112.50	5351.06
Persons/household (no.)			2.05	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.

ROUNDING

24 The PBLCI uses a hierarchy of rounding procedures to ensure consistency between published index numbers and percentage changes. However, rounding differences can arise in the 'points contributions' published because of the different levels of precision required in those data.


ANALYSIS OF PBLCI CHANGES

25 Movements in indexes from one period to another can be expressed either as changes in index points or as percentage changes. The following example illustrates the method of calculating changes in index points and percentage changes between any two periods:

All groups PBLCI: Weighted average of eight capital cities.
June Quarter 2011 116.2 (see Table 1)
less June Quarter 2010 111.2
Change in index points 5.0
Percentage change 5.0/111.2 x 100 = 4.5%