Annual weight update of the CPI and Living Cost Indexes

This article presents an overview of the 2024 annual update to the weights for the Consumer Price Index (CPI) and Selected Living Cost Indexes (SLCIs). The new weights have been implemented in January for the monthly CPI indicator (released 28 February 2024) and will apply from the March 2024 quarter for the quarterly CPI and SLCIs. The March quarter CPI will be released on 24 April 2024 and the SLCIs will be released on 1 May 2024.
The ABS has annually updated weights for the CPI and SLCIs since 2018, predominantly using Household Final Consumption Expenditure (HFCE) data. Annually re-weighting the CPI ensures that the CPI basket continues to be representative of contemporary spending by Australian households. Further details on annually re-weighting the CPI can be found in the information paper An Implementation Plan to Annually Re-weight the Australian CPI, 2017. 

This article provides an overview of the data sources and methods used to update the CPI and SLCI weights for 2024 and presents the updated weighting patterns.

The 2024 weight update follows the partial weight update in the September 2023 quarter. The partial update increased the weight for International holiday travel with the weight for the other components in the basket adjusted to offset the increase in the weight for International holiday travel. The analysis in this article focuses on the change in the weights between the 2024 update and the previous comprehensive update in the December 2022 quarter.
 

For further information contact prices.statistics@abs.gov.au. 

The main data source to update the 2024 CPI and SLCI weights is HFCE data from the 2022-23 financial year. Other data sources such as supermarket scanner data and Retail Trade data provide a more detailed breakdown and were used to supplement the HFCE data. These data sources are used to split the aggregate HFCE total value in order to update the lower level weights in the CPI. For example, the scanner data is used to split the HFCE value for Food into categories such as meat products and dairy products.

Overseas Arrivals and Departures (OAD) data was used to derive the CPI weight for International holiday travel. OAD data up to November 2023 showed that the number of people travelling has returned to around 90% of pre-COVID-19 (2019) levels. With the use of OAD data, expenditure on international travel was derived as 90% of the 2019 HFCE level.

As with previous years, updated weights for some of the components of the CPI and SLCIs are derived from alternative data sources. These components are:
 

• New dwelling purchase by owner-occupiers;
• Other financial services; and
• Mortgage interest charges (only included in the SLCIs).

For more information on the data sources used see the information papers: Introduction of the 17th Series Australian Consumer Price Index and An Update on the Annual Re-weighting of the Australian CPI and Living Cost Indexes.

The use of HFCE data for CPI weights provides more up-to-date-weights than under previous methods, enhancing the CPI in its principal purpose as a macro-economic indicator of household inflation. However, there are challenges with using HFCE data for CPI weighting purposes. These challenges were investigated by the ABS and detailed in the information paper Increasing the Frequency of CPI Expenditure Class Weight Updates.
For the 2024 update, 12-month movements in the HFCE data from the financial year 2021-22 to 2022-23 were used. The approach for the 2024 update to re-weight the CPI and SLCIs can be summarised as follows:
 

1. Align the HFCE data with the scope and classifications of the CPI and SLCIs at a detailed product level. This requires the removal of some components of HFCE (e.g. expenditure by Non-Profit Institutions Serving Households (NPISH)).
2. Produce a concordance of the HFCE data to the Consumer Price Index Commodity Classification (CPICC). This provides HFCE data for each CPI expenditure class (EC) for the CPI and SLCIs. These first two steps result in HFCE data aligned to the same concepts and scope of the CPI and SLCIs.
3. Calculate 12-month movements from 2021-22 to 2022-23 for the HFCE data from step 2, and apply these movements to each CPI EC to update the expenditure values.
4. Price update the 2022-23 expenditure values for each CPI EC to the December 2023 quarter.
5. Re-scale the price updated expenditure values across all CPI ECs so they sum to 100 (i.e. expenditure shares).

The CPI weights reflect the relative amount spent on goods and services as a proportion of total expenditure by all households. SLCIs similarly reflect expenditure by the different sub-groups of the household population represented by each index. The weights do not represent the expenditure of an 'average household'. The weights for each of the CPI groups are shown in the following table.

Over the past couple of years there has been a shift away from spending on goods towards services. Following the onset of the COVID-19 pandemic there was strong demand for goods such as household appliances, furniture and audio visual and computing equipment. Lockdowns and border closures saw spending fall for services such as restaurant meals and holiday travel. This resulted in the contribution of Goods reaching 58% of the CPI basket and 42% for Services. For the 2024 updated CPI weights, the contribution of Goods has fallen to 54.5% and Services increased to 45.5%, which reflects spending patterns closer to the pre-COVID-19 period.

One thing to note when comparing the weights between 2023 and 2024 is that the weights are relative. The weight of a component of the CPI depends on how expenditure on that component compares to total expenditure (i.e. expenditure shares), rather than the absolute change in expenditure. This is particularly notable for the 2024 re-weight with the large increase in the expenditure share for the Recreation and culture group, due predominantly to the increase in weight for International holiday travel.

For example, if the increase in expenditure for a particular expenditure class (EC) is greater than the increase in total expenditure (in percentage terms), the weight for that EC will increase, reflecting that the EC now represents a greater proportion of total expenditure than it did previously. Conversely, if the increase in expenditure for a particular EC is less than the increase in total expenditure, the weight for that EC will decrease.

For the 2024 CPI weight update, the largest weight remains for the Housing group (21.74%), followed by Food and non-alcoholic beverages (17.15%), Recreation and culture (12.55%) and Transport (11.42%).

Changes in the CPI weights are discussed in more detail below. All analysis refers to the weighted average of the eight capital cities. A more detailed breakdown of the CPI weights is available in appendix 1.

The weight for the Alcohol and tobacco group fell 0.89pp (percentage points). The fall is largely due to a decrease in the weight for Tobacco (-0.57pp). Over the past 12 months purchases of cigarettes fell as smoking rates continued to decline, reflecting lower spending on tobacco products (excluding vapes).

The weight for the Housing group fell 0.50pp due to a decrease in the weight for New dwellings purchase by owner-occupiers (-0.55pp). There were fewer dwelling commencements in 2023 as economic uncertainty and higher interest rates led to reduced new dwelling construction as reflected in lower building approvals and new loan commitments for construction and purchase of new dwellings. 

The weight for Rents increased 0.28pp as vacancy rates remained at historic lows, which saw rental prices increase by 7.3% in the 12 months to the December 2023 quarter, more than the overall CPI increase of 4.1%. Similarly, higher electricity prices, which rose 6.9% in the 12 months to December 2023, has led to an increase in the weight for Electricity increase of 0.14pp.

Changes in Housing group weights differed across the capital cities. Appendix 2 provides a comparison of the Housing group weights for each capital city.

The weight for the Furnishings, household equipment and services group fell 0.51pp as weak demand led to lower expenditure and a fall in prices over the past 12 months for discretionary goods such as Furniture (-0.22pp) and Major household appliances (-0.07pp). The weight for Child care fell slightly (-0.03pp) due to changes to the Child Care Subsidy reducing out-of-pocket costs for households offsetting the small increase in usage and higher fees.

The weight for the Transport group increased by 0.43pp due to an increase in the weight for Motor vehicles (+0.21pp). A record number of vehicles purchased in 2023 and with prices remaining elevated, expenditure increased. The weight for Automotive fuel (+0.12pp) also rose due to petrol prices remaining high over 2023.

The weight for the Recreation and culture group increased 1.71pp. More Australians continued to holiday overseas and international airfare prices remained elevated, which resulted in an increase in the weight for International holiday travel and accommodation of 0.92pp. The outbreak of COVID-19 and the shutting of international borders resulted in expenditure falling to near zero for International holiday travel. This saw the weight for International holiday travel in the CPI fall from 3.38% in 2019 to 0.08% in 2020 and 2021. With the re-opening of borders in late 2021, Overseas Arrivals and Departures (OAD) data show that the number of people travelling has returned to around 90% of pre-COVID (2019) levels. The increase in the weight for International holiday travel was largely captured in the partial weight update implemented in the September 2023 quarter. The partial update saw the weight for International holiday travel increase from 1.85% to 2.84%.

The weight for Domestic holiday travel and accommodation (+0.82pp) also rose as holidaying domestically remained popular and prices remained elevated for domestic accommodation and airfares. 

Overseas Arrivals and Departures, Australia | Australian Bureau of Statistics (abs.gov.au)

Consumer Price Index, Australia methodology, December Quarter 2023