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. This is 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 2003-04 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 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 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 also 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 also 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 and other financial services).

16 The 2003-04 HES sample size is not considered large enough to provide reliable estimates for PBLCI households at the capital city level. Therefore, the expenditure weights for PBLCI households are estimated using national expenditures. The CPI expenditure weights, on the other hand, are estimated at the capital city level.


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 The PBLCI has been derived by combining two existing ALCIs - age pensioner and other government transfer recipients. Specifically, the PBLCI is calculated by summing the expenditure aggregates for these two population subgroups at the expenditure class level.

19 Expenditure classes are the lowest level at which the expenditure weights are fixed for the duration of an index series. The new expenditure aggregates for the expenditure classes are then summed to produce an All groups expenditure aggregate. A price index is then calculated by comparing the new expenditure aggregate with that of the previous period.

20 The measures of price change, with the exception of those for interest charges, were sourced from the CPI. Price measures for interest charges have been maintained separately by the ABS on a basis comparable with those employed in the CPI prior to September quarter 1998.

21 While most item price indexes were constructed by direct reference to the equivalent CPI expenditure class indexes, some were constructed by reference to lower level CPI price data. The 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.

22 Over time the ABS will progressively refine the methodology used to construct these indexes to better reflect other differences in prices that may be faced by different household types. An example is making allowances for the possibility that different household types may make purchases at various outlet types which could experience a different rate of price change.

23 The ABS will expand the sample for the 2009-10 HES to include more households in the reference population i.e. age pensioner households and other government transfer recipient households. An increase in sample size is necessary to improve the reliability of the overall estimates of household level expenditures by age pensioner and other government transfer recipient households.


SERIES LINKS

24 The weights of the ALCI population sub-groups were based on the 2003-04 HES and used to construct the indexes from September quarter 2005 onwards. The PBLCI was constructed by combining the weights of two ALCI population sub-groups: age pensioner households and other government transfer recipient households. The PBLCI commences at the June quarter 2007.


EXPENDITURE WEIGHTS

25 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 Appendix 3 of ABS Information Paper: Introduction of the Pensioner and Beneficiary Living Cost Index, Australia (cat. no. 6466.0).


ROUNDING

26 The CPI 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

27 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.

Index numbers:
September quarter 2010	112.3 (see table 1)
less September quarter 2009	108.2 (see table 1)
Change in index points	4.1
Percentage change	4.1/108.2 X 100 = 3.8% (see table 1)