6461.0 - Consumer Price Index: Concepts, Sources and Methods, 2011
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 19/12/2011
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13.3 As part of this major review the ABS published three information papers:
13.4 These papers describe the review process, the issues considered, the review outcomes, the re-weighting process, and outline the changes from the previous series. 13.5 The 15th series CPI, introduced in the September quarter 2005, was a minor review. The item weights were revised in line with expenditure patterns identified in the 2003-04 HES, and a new sub-group called Financial services was introduced into the index. Once again, the ABS published an Information Paper describing the changes:
13.6 The 14th series of the CPI was introduced in the September quarter 2000, after a minor review completed early in 2000. The changes introduced in the 14th series were considered necessary to address issues arising from the introduction of The New Tax System (TNTS) on 1 July 2000. As part of the review process the ABS published Information Papers describing the changes:
13.7 Prior to the 16th series review, the previous major review of the CPI was the 13th series review conducted during 1997 and 1998 and introduced in respect of the September quarter 1998. A major outcome of that review was the decision that the CPI would change from a measure of the change in living costs of employee households to a general measure of price inflation for the household sector. Consequently the population coverage was expanded from wage and salary earner households to include all metropolitan households. 13.8 As part of this major review, the ABS published three Information Papers:
PUBLISHED STATISTICS 13.9 The CPI is compiled quarterly by the ABS for quarters ending on 31 March, 30 June, 30 September, and 31 December each year. The data are typically released on the fourth Wednesday after the end of the reference quarter, depending on public holidays, but no later than the last Wednesday of the month after the end of the reference quarter, in the publication Consumer Price Index, Australia (cat. no. 6401.0). 13.10 The statistics are published in several different ways. The main mechanism for dissemination of ABS data is through the ABS website www.abs.gov.au. The website provides free of charge:
13.11 The CPI is published for both quarters and financial years. The index number for a financial year is the simple arithmetic average (mean) of the index numbers for the four quarters of that year. Index numbers for calendar years are not published by the ABS, but can be calculated as the simple arithmetic average of the quarterly index numbers for the year concerned. Release of CPI data 13.12 To ensure impartiality and integrity of ABS statistics, it is standard ABS policy and practice to make all our statistical releases available on our website to all government, commercial and public users of our statistics, simultaneously from 11.30 am (Canberra time) on the day of their release. Prior to 11.30 am, all ABS statistics are treated as confidential and regarded as 'under embargo'. 13.13 However, given the high level of market and community interest in the CPI, it is important from a 'public good' perspective that key ministers are able to respond in an informed manner to requests from the media for early comment on the released statistics, thereby avoiding any inadvertent misinterpretation. For this purpose, a secure 'lockup' facility is provided to enable authorised government officials and ministerial staff time to analyse the release and develop a briefing to be provided to relevant ministers after lifting of the embargo. 13.14 Authorised persons attending a lockup are required to remain in a secure room managed by ABS staff, and are prohibited from communicating any information from the statistical release to anyone outside the room, until the embargo is lifted at 11.30 am (Canberra time). Attendees at the lockup are also required to sign security undertakings which include provision for prosecution under the Crimes Act 1914 for anyone who breaches the conditions for attending the lockup. A list of products approved for provision to authorised persons via ABS-hosted lockups on the morning of the day of their release is available on the ABS website on the 'Policy on Pre-Embargo Access to ABS Statistical Releases' in the 'About Us' section. Revisions 13.15 The ABS strives for accuracy in all of its publications. The accuracy of the CPI is of particular importance to the ABS, and in recognition of the use of the CPI in determining economic policy and in contract price indexation, the ABS makes an effort to eliminate the need for revision. However, if revision is required, the ABS's revisions policy is based on the Resolution on Consumer Price Indices issued by the International Labour Organization in 2003: "When it is found that published index estimates have been seriously distorted because of errors or mistakes made in their compilation, corrections should be made and published. Such corrections should be made as soon as possible after detection according to publicly available policy for correction. Where the CPI is widely used for adjustment purposes for wages and contracts, retrospective revisions should be avoided to the extent possible." INTERPRETING INDEX NUMBERS Index points and percentage changes 13.16 Movements in indexes from one period to any other period can be expressed either as changes in index points or as percentage changes. The following example illustrates these calculations for the All groups CPI (weighted average of the eight capital cities) between September quarter 2011 and the September quarter 2010. The same procedure is applicable for any two periods.
less index number for September quarter 2010 = 173.3 Change in index points = 6.1 Percentage change 6.1/173.3 x 100 =3.5% 13.17 For most applications, movements in price indexes are best calculated and presented as percentage changes. Percentage change allows comparisons in movements that are independent of the level of the index. For example, a change of 2.0 index points when the index number is 120.0 is equivalent to a change of 1.7%. But if the index number were 80.0, a change of 2.0 index points would be equivalent to a change of 2.5%, a significantly different rate of price change. Only when evaluating change from the index reference period of the index will the points change be numerically identical to the percentage change. 13.18 The percentage change between any two periods must be calculated, as in the example above, by direct reference to the index numbers for the two periods. Adding the individual quarterly percentage changes will not result in the correct measure of longer term percentage change. That is, the percentage change between (say) the June quarter of one year and the June quarter of the following year will not necessarily equal the sum of the four quarterly percentage changes. The error becomes more noticeable the longer the period covered, and the greater the rate of change in the index. This can readily be verified by starting with an index of 100.0 and increasing it by 10% (multiplying by 1.1) each period. After four periods, the index will equal 146.4 delivering an annual percentage change of 46.4%, not the 40.0% obtained by adding the four quarterly changes of 10.0%. 13.19 Although the CPI is compiled and published as a series of quarterly index numbers, its use is not restricted to the measurement of price change between quarters. A quarterly index number can be interpreted as representing the average price during the quarter (relative to the index reference period), and index numbers for periods spanning more than one quarter can be calculated as the simple (arithmetic) average of the quarterly indexes. For example, an index number for the calendar year 2011 is the arithmetic average of the index numbers for the March, June, September and December quarters of 2011. 13.20 This characteristic of index numbers is particularly useful. It allows average prices in one year to be compared with those in any other year. It also enables prices in (say) the current quarter to be compared with the average prices prevailing in a previous year. 13.21 The quarterly change in the All groups CPI represents the weighted average price change of all the items included in the CPI. Publication of index numbers and percentage changes for components of the CPI are useful in their own right. However, these data are often not sufficient to enable important contributors to total price change to be reliably identified. What is required is some measure that encapsulates both an item’s price change and its relative importance in the index. 13.22 If the All groups CPI index number is thought of as being derived as the weighted average of the indexes for all its components, then in concept the index number for a component multiplied by its weight to the All groups CPI index results in what is called its points contribution. This relationship only applies if all the components have the same reference base, and there has been no linking of component series since the index reference period. However, the Australian CPI has been linked several times since its index reference period (1989-90), and therefore a more practical method for calculating points contribution is used. 13.23 The published points contributions are calculated by the ABS using the expenditure aggregates. In any period, the points contribution of a component to the All groups CPI index number is calculated by multiplying the All groups CPI index number for the period by the expenditure aggregate for the component in that period, and dividing by the All groups CPI expenditure aggregate for that period. Calculating points contribution using published data may give a different result to the points contribution derived using expenditure aggregates. Also, building up from the individual products' points contributions may give a different result from taking the All groups CPI index number and subtracting the points contributions for those products. The reasons for these differences are the different levels of precision used in the calculations. 13.24 The change in a component item’s points contribution from one period to the next provides a direct measure of the contribution to the change in the All groups CPI index resulting from the change in that component's price. In addition, information on points contribution, and points contribution change, is of immense value when analysing sources of price change, and for answering what-if type questions. Consider the following data extracted from the September quarter 2011 CPI publication.
13.25 Using only the index numbers themselves, the most that can be said is that between the June and September quarters 2011, the price of Electricity increased by more than the overall CPI (by 7.8% compared with an increase in the All groups CPI of 0.6%). The additional information on points contribution and points change can be used to:
13.26 The following questions and answers illustrate the uses that can be made of the CPI. Question 1:
Response 1:
Question 2:
Response 2:
13.27 To illustrate this, consider a simple example of expenditure on oranges in two periods. The product of the quantity and the price gives the expenditure in a period. Suppose that in the first period ten oranges were purchased at a price of $1.00 each, and in the second period fifteen oranges were purchased at a price of $1.50 each. Expenditure in period 1 would be $10.00 and in period 2 $22.50. Expenditure has increased by 125%, yet the volume (i.e. the number of oranges) has only increased by 50% with the difference being accounted for by a price increase of 50%. In this example all the price and quantity data are known, so volumes can be compared directly. Similarly, if prices and expenditures are known, quantities can be derived. 13.28 However what if the actual prices and quantities are not known? If expenditures are known, and a price index for oranges is available, the index numbers for the two periods can be used as if they were prices to adjust the expenditure for one period to remove the effect of the price change. If the price index for oranges was equal to 100.0 in the first period, the index for the second period would equal 150.0. Dividing expenditure in the second period by the index number for the second period, and multiplying this result by the index number for the first period provides an estimate of the expenditure that would have been observed in the second period had the prices remained as they were in the first period. This can easily be demonstrated using the oranges example:
13.29 So, without ever knowing the actual volumes (quantities) in the two periods, the adjusted second period expenditure ($15.00), can be compared with the expenditure in the first period ($10.00) to derive a measure of the proportional change in volumes: $15/$10 = 1.50, which equals the ratio obtained directly from the comparison of the known volumes. 13.30 We now return to the question on expenditure on Food and non-alcoholic beverages recorded in the HES in 2003-04 and 2009-10. As the HES data relates to the average expenditure of Australian households, the ideal price index would be one that covers the retail prices of Food and non-alcoholic beverages for Australia as a whole. The price index which comes closest to meeting this ideal is the index for the Food and non-alcoholic group of the CPI for the weighted average of the eight capital cities. The Food and non-alcoholic index number for 2003-04 is (149.3 + 152.0 + 154.7 + 153.3)/4 = 152.3 and for 2009-10 it is (186.6 + 189.9 + 191.3 + 190.7)/4 = 189.6. Using these index numbers, recorded expenditure in 2009-10 ($216.40) can be adjusted to 2003-04 prices as follows:
13.31 The adjusted 2009-10 expenditure of $173.82 can then be compared to the expenditure recorded in 2003-04 ($158.58) to deliver an estimate of the change in volumes. This indicates a volume increase of 9.6%. Constructing analytical series 13.32 Although the ABS produces a wide range of indexes from the CPI, there may be occasions when none of these exactly suit a user’s special requirement. In this case the user may wish to construct their own index based on component indexes of the CPI. For example, suppose a researcher is interested in how petrol prices moved relative to the price of all other consumer goods and services. As the All groups CPI includes Automotive fuel, it is not the ideal measure for comparative purposes, so the researcher wishes to compile an All groups CPI excluding Automotive fuel index. Table 13.2 shows the construction of a time series of All Groups CPI excluding Automotive fuel index. 13.33 The index can be compiled directly by subtracting index points contributions (see paragraph 13.16); however, in constructing an index of this type over multiple series, allowance should be made for the change in weights with each CPI series through the calculation of a link factor. 13.34 The following formula is used to calculate an All groups CPI Index excluding a particular component: where IAg-Af is the Index number for All groups CPI excluding Automotive fuel, IAg is the All groups CPI index number, PCAf is the Points Contribution for Automotive fuel and LF is the link factor. 13.35 The link factor can be calculated as follows: where the 0 and 1 superscript represent the earlier and later series being calculated respectively. 13.36 The purpose of the link factor is to create a continuous series, allowing for changes in the component weights between the different series. 13.37 When the 16th series CPI was introduced in the September quarter 2011, Automotive fuel contributed 7.55 index points to the All groups CPI index, based on 15th series weights, and 6.33 index points based on 16th series weights. The All groups CPI index was 178.3. Thus the index for All groups CPI excluding Automotive fuel is calculated as 178.3 - 7.55 = 170.8 under the 15th series, and 178.3 - 6.33 = 172.0 under the 16th series for that quarter. 13.38 The link factor between the 15th and 16th series is calculated using equation 13.2 as follows:
13.39 The 16th series index number for the quarter is then divided by the link factor to give a final index number 172.0/1.007145 = 170.8. Each index number calculated from the 16th series points contributions must be divided by the link factor to give a continuous index.
Precision and rounding 13.40 To ensure consistency from one publication to the next, the ABS uses a set of rounding conventions or rules for calculating and presenting the results. These conventions strike a balance between maximising the usefulness of the information for analytical purposes, and retaining a sense of the underlying precision of the estimates. Users need to consider these conventions when using the CPI for analytical or other special purposes. 13.41 Index numbers are always published relative to a base of 100.0. Index numbers and percentage changes are always published to one decimal place, and the percentage changes are calculated from the 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. 13.42 Points contributions are published to two decimal places. Change in points contributions is calculated from the rounded points contributions. Rounding differences can arise in the points contributions where different levels of precision are used. Document Selection These documents will be presented in a new window.
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