EXPLANATORY NOTES


OVERVIEW OF THE SELECTED LIVING COST INDEXES, AUSTRALIA

1 The Selected Living Cost Indexes (SLCIs), Australia incorporates the Pensioner and Beneficiary Living Cost Index (PBLCI) and the Analytical Living Cost Indexes (ALCIs). The ALCIs have been compiled and published by the ABS since June 2000 and were developed in recognition of the widespread interest in the extent to which the impact of price change varies across different groups of households in the Australian population.

2 ALCIs are prepared for four types of Australian households:

• 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 Household Expenditure Survey (HES) defined reference person is 'retired' (not in the labour force and over 55 years of age)).

3 The PBLCI was introduced in the June quarter 2009 and is a measure of the effect of changes in prices on the out-of-pocket living expenses experienced by the following two groups of households in the Australian population:

• age pensioner households, and
• other government transfer recipient households.

4 The ABS publishes these indexes quarterly in Selected Living Cost Indexes, Australia (cat. no. 6467.0).

5 Households have been categorised based on the principal source of household income, derived from the 2009-10 Household Expenditure Survey (HES) (cat. no. 6530.0).

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


MAIN CONCEPTUAL DIFFERENCES BETWEEN THE CPI AND THE SELECTED LIVING COST INDEXES

7 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.

8 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.

9 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

10 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.

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

12 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.

13 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.

14 Under the outlays approach used in the LCIs, 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 LCIs therefore exclude the net purchase of housing and the increase in volume of housing due to renovations or extensions.

15 Insurance (other than health insurance) is treated differently in the LCIs. 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 LCIs, the weight relates to the gross value of insurance premiums paid by households.

16 Financial services are treated differently in the LCIs. The LCIs include mortgage interest and consumer credit charges but exclude all other financial services (i.e. deposit and loan facilities (direct charges), and other financial services).

17 The Selected Living Cost Indexes will continue to be published at the national level only.


METHODOLOGY

18 Construction of the LCIs 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.

19 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.

20 The expenditure weights for self-funded retiree households were retained at the state/territory level. LCIs are published as totals for Australia only. The LCIs weighting patterns from the September quarter 2011 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).

21 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.

22 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.

23 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 the September quarter 2011 to include more households in the reference population i.e. age pensioner households and other government transfer recipient households.

24 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.

25 From the September quarter 2012, the LCIs, like the CPI, use an index reference period of 2011-12 = 100.0. Prior to the September quarter 2012, the LCIs for employee, age pensioner, other government transfer recipient and self-funded retiree households were published using an index reference period of June quarter 1998 = 100.0 and the pensioner and beneficiary LCI was published using an index reference period of June quarter 2007 = 100.0.


SERIES LINKS

26 The LCIs for employee, age pensioner, other government transfer recipient and self-funded retiree households 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.

27 The weights of the PBLCI population subgroup were 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 PATTERNS OF THE SELECTED HOUSEHOLD TYPES

28 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 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).

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

30 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.

Table 1: Estimated average weekly expenditure during 2009-10, Household type by Commodity group(a)(b)
	PBLCI	Employee	Age pensioner	Other government transfer recipient	Self-funded retiree	CPI
Commodity group	$	$	$	$	$	$
Food and non-alcoholic beverages	135.92	262.48	120.72	150.86	176.66	230.87
Alcohol and tobacco	56.19	114.63	36.12	75.92	68.16	96.87
Clothing and footwear	32.27	64.39	26.31	38.12	43.29	54.58
Housing(c)	135.91	205.32	92.43	178.64	113.89	305.75
Furnishings, household equipment and services	60.00	142.82	59.81	60.20	119.83	124.79
Health	35.91	80.73	47.69	24.32	87.22	72.56
Transport	63.26	182.25	50.65	75.65	118.13	158.39
Communication	26.26	46.45	19.80	32.62	31.84	41.81
Recreation and culture	67.90	194.82	61.91	73.79	215.24	172.30
Education	10.07	45.13	1.54	18.45	9.06	43.67
Insurance and financial services(d)	37.44	218.75	22.19	52.42	39.40	69.71
All groups	661.13	1 557.77	539.17	780.99	1 022.72	1 371.30
(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.

31 Table 2 presents the estimated household size during 2009-10 for each of the LCI household types and the CPI.

Table 2: Estimated household size during 2009-10, Household type(a)
	PBLCI	Employee	Age pensioner	Other government transfer recipient	Self-funded retiree	CPI
Number of households in population subgroup ('000)	1 112.50	3 471.60	551.40	561.10	(b)263.90	5 351.06
Persons/household (no.)	2.05	2.84	1.52	2.57	1.63	2.60
(a) Based on 2009-10 Household Expenditure Survey (HES).
(b) 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 16 and 17 of the Explanatory Notes.

32 Table 3 presents the average weekly expenditure data (presented in Table 1) 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 3: Expenditure weights, Household type by Commodity group(a)(b)
	PBLCI	Employee	Age pensioner	Other government transfer recipient	Self-funded retiree	CPI
Commodity group	%	%	%	%	%	%
Food and non-alcoholic beverages	20.56	16.85	22.39	19.32	17.27	16.84
Alcohol and tobacco	8.50	7.36	6.70	9.72	6.66	7.06
Clothing and footwear	4.88	4.13	4.88	4.88	4.23	3.98
Housing(c)	20.56	13.18	17.14	22.87	11.14	22.30
Furnishings, household equipment and services	9.08	9.17	11.09	7.71	11.72	9.10
Health	5.43	5.18	8.85	3.11	8.53	5.29
Transport	9.57	11.70	9.39	9.69	11.55	11.55
Communication	3.97	2.98	3.67	4.18	3.11	3.05
Recreation and culture	10.27	12.51	11.48	9.45	21.05	12.56
Education	1.52	2.90	0.29	2.36	0.89	3.18
Insurance and financial services(d)	5.66	14.04	4.12	6.71	3.85	5.08
All groups	100.00	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.

33 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.


ROUNDING

34 The LCIs use 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.