CHAPTER 6 WEIGHTS AND THEIR SOURCES


INTRODUCTION

6.1 This chapter describes the procedures that are typically followed in updating the Consumer Price Index (CPI) weights.

6.2 Weighting practices vary at different levels of the CPI. At the published levels, weights are currently reviewed every six years. These reviews follow the release of data from the Household Expenditure Survey (HES). At the unpublished levels, the weights can be updated at any time to accurately represent household spending patterns. At the elementary aggregate, or price-sample level, there is no explicit use of weights.


FIXED WEIGHTS

6.3 At the level of the index at which the weights are fixed, the ideal is to have a snapshot of all household expenditure. It is important that the data are consistent across the population group, that is expenditures can be added up without concerns about coverage and double counting, and that all the information is for the same period. For example, if expenditures are for different periods for different items, then these could be affected by changes in economic conditions, tax rates, and population growth. Any of these influences could easily distort the weights. In addition, although an information source might provide an estimate of total sales of an item, it would be necessary to know the proportion of those sales to households as consumers. For example, sales of whitegoods will include sales that are not in scope of the CPI, for example sales to businesses, and to households as owners of rental properties.

6.4 The HES is the only source of data that comes close to the ideal. The HES is a sample of approximately 7,000 metropolitan households. Data are collected using a diary of personal expenditures in which residents aged 15 years and older record their expenditure over a two-week period. An interview questionnaire also collects information about each household's characteristics, expenditures common to all members of the household (e.g. health service payments), and irregular or infrequent expenditures. The HES used in the 16th series CPI was collected in respect of 2009-10.

6.5 Although the HES provides a comprehensive coverage of household expenditures, there are some weaknesses in the HES data for CPI purposes.

6.6 Being a survey, the HES is subject to sampling error. It is possible for the selection of one or several households with exceptionally high expenditure on an item to significantly affect the expenditure estimate for that item in a region, especially in the smaller capital cities.

6.7 Some expenditures recorded in the HES are not fully contemporaneous. Estimates for some items which are more expensive or purchased infrequently are obtained or supplemented by recall, rather than relying on expenditures actually recorded in the diary during the two weeks that the household is included in the survey. Periods over which households are asked to recall expenditure vary depending on the item.

6.8 The HES records all data exactly as reported by the households with no adjustments for known cases of under-reporting, especially expenditure on alcohol and tobacco.

6.9 There are some expenditures required by the CPI which cannot be obtained from households, such as the net insurance charge (gross premiums less claims).

6.10 Thus, various adjustments need to be made to the information reported in the HES before it can be used in the CPI, and for some items the HES data are supplemented or replaced by other data which provide a more accurate estimate of expenditure. For more information on expenditures not sourced from HES, see paragraphs 6.23-6.36.


Adjustments for under reporting

6.11 There are data sources other than the HES that provide estimates of household expenditure on some commodities, but often only nationally. These alternative sources are used for validating the HES data. For most products included in the CPI, these alternative data are similar to the HES estimates. However, historically there have been significant differences between HES and the other data sources for household expenditure on alcohol and tobacco. For both products, households are the major consumers, and the imposition of excise and other taxes on these products means that the alternative estimates are more accurate than the HES estimates which appear to understate household expenditure.

6.12 As a result, HES estimates are adjusted for under-reporting based on factors derived at the national level using National Accounts Household Final Consumption Expenditure (HFCE) data. These national factors were applied to the HES expenditure estimates for each capital city. The 2009-10 HES has estimated expenditure for alcohol at a little over half and tobacco at a little under half of the respective National Accounts estimates.

6.13 As households do not always separately identify alcohol and meal expenditures when reporting expenditure on restaurant meals in the HES, a small adjustment was made using the proportion of reported meal expenditure that was alcohol, estimated from an analysis of HES unit records. Meal expenditure was then reduced by the proportion of reported meal expenditure that was alcohol and the difference included in expenditure on alcohol. This adjustment did not impact overall household expenditure.


Recall adjustment

6.14 Some expenditures are collected in the HES as recalled items rather than as diary entries. The extent of the recall period varies. For some items, it is purchases in the last three months (most whitegoods, furniture and house repairs); last payment for general rates, electricity, and health services and the last 12 months including motor vehicle purchase, motor vehicle repair and maintenance, education, insurance, overseas travel, and house alterations. To the extent that prices for these items change between the time that the household last purchased them and their inclusion in the HES, expenditures will not accurately reflect the underlying quantities acquired during 2009-10.

6.15 No adjustments are made for any items where the recall period is the last three months since the adjustments would be small. Most items where the recall period is the last payment are typically those with a short billing cycle, often quarterly, or where there are options to pay periodically (e.g. local government rates). This leaves only a few items such as motor vehicle purchase, overseas holiday travel, and education where expenditures could have been incurred up to twelve months before inclusion in the HES. Adjustments are made for these items.

6.16 The adjustment procedure for a recall period of twelve months is as follows. In the first quarter (Q1) of the HES reference year, the period potentially covered will be from the start of the corresponding quarter of the previous year (for those households selected in the first week of the HES reference year) through to the end of the first quarter of the reference year. Similarly, the pricing period for the households first included in the last week of Q1 in the reference year will commence in the last week of Q1 of the previous year. If expenditures are distributed uniformly over the period, then effectively expenditures in the reference quarter and the corresponding quarter of the previous year will only be half that for the intervening quarters. Thus, assigning weights of, say, one for the intervening quarters and 0.5 for the start and end quarters, we can derive a weighting pattern as shown below.

6.17 Thus the adjustment factor for items with a twelve-month recall for the 2009-10 HES is: (6.1)



where I_S09 is the CPI index number for the expenditure class for the September quarter 2009 etc.

Using the following hypothetical index numbers:



The result of the above formula is:

=1.02

(which is the adjustment factor to be applied to the recalled price).

6.18 With a generally low rate of price change over 2008-09 and 2009-10, the adjustments made for recall were small. However, these adjustments can have a significant impact during periods of high inflation.


Salary sacrifice

6.19 Salary sacrifice is an arrangement between an employee and employer whereby part of the employee's pre-tax cash salary is traded for non-cash benefits. Conceptually, these arrangements should be captured in both gross wages and salaries, and household expenditure. In the 2009-10 HES, the salary sacrifice question module was expanded to collect more detailed information on motor vehicles purchased via a salary sacrifice arrangement. In addition, respondents were instructed to exclude expenditure on motor vehicles and related items for those motor vehicles purchased through salary sacrifice from the motor vehicle question modules within the household questionnaire, to ensure no double counting.

6.20 The items that have been adjusted for salary sacrifice are motor vehicles and computers. Salary sacrifice expenditure on child care was not included as it was regarded as insignificant. To ensure the expenditure on motor vehicles includes all motor vehicles purchases (i.e. including via salary sacrifice) some adjustment is needed to the relevant HES items. Therefore salary sacrifice amounts reported against vehicles were allocated to motor vehicle purchases, registration, insurance, motor vehicle repair and servicing, and automotive fuel.


Aberrant expenditures

6.21 The HES data was compared across capital cities and over time to validate the 16th series expenditure at the expenditure class level. The HES expenditure in 2003-04 was revalued to 2009-10 dollars to derive the volume changes between the two HES reference years and compared to the 2009-10 HES. Any large differences can then be investigated to see if they were valid For example, there was a large rise in expenditures on rents between the 2003-04 HES and the 2009-10 HES. The increase was due to both a price and volume increase. The volume increase was driven by increases in the size and quality of dwellings as well as a small increase in the proportion of people renting.

6.22 A small number of unit record adjustments were made in the smaller capital cities where HES sample sizes are smaller and, in general, the standard errors are larger. The outlier adjustment used was winsorisation, which involves replacing an unrepresentative expenditure by the next largest estimate. Where unit record outliers could not be identified, differences were further investigated. A small number of volume changes could not be validated, resulting in adjustments using either alternative volume data or subjective judgement based on market intelligence.


Expenditures not sourced from HES

New dwelling purchase by owner-occupiers

6.23 New dwelling purchase by owner-occupiers in the CPI includes the cost of 'net additions of household sector dwellings' as a measure of owner-occupier housing costs which includes new homes (excluding land) and major improvements. Sales of houses that take place between households (generally established dwellings) are excluded so that the weights relate only to net additions to the housing stock arising from household purchases from other sectors (i.e. from businesses such as builders and developers).

6.24 The net expenditure on new dwelling purchase by owner-occupiers house acquisition was estimated by applying the average value of private dwelling completions by State for 2009-10 published in Building Activity, Australia (cat. no. 8752.0) to the net additions in the number of owner-occupier households. The net additions are calculated by using data from Household and Family Projections, Australia (cat. no. 3236.0) to move forward the Census 2006 capital city counts of owner-occupied households. In line with standard practice relating to the inclusion of subsidies in the CPI, subsidies paid to first-home buyers as part of the Commonwealth government's 'First Home Owner Scheme and 'First Home Owner Boost' were treated as negative expenditure and subtracted from the new dwelling purchase by owner-occupiers house acquisition expenditure.

6.25 Expenditure on other items that are included in new dwelling purchase by owner-occupiers are ‘Alterations and additions’ and ‘Installed appliances’. This expenditure was obtained from the 2009-10 HES and added to the estimate for house acquisition to provide the total expenditure on new dwelling purchase by owner-occupiers.

Motor vehicles

6.26 The data source for motor vehicles changed for the 16th series CPI. The weight for motor vehicles was derived from the National Accounts HFCE data. This was done to accommodate a coverage change. In the 16th series CPI the weight for motor vehicles includes new cars, transfer of used cars to the household sector (from business or government) and the service fee from the transfer of second hand cars. In the 15th series CPI, only new cars were included and the weight was derived from the 2003-04 HES data.

Higher Education Loan Program (HELP)

6.27 The HES higher education item includes HELP payments made by households upfront plus any HELP repayments made through the taxation system during the reference period. This measure is not consistent with the concept of an acquisitions based CPI, where expenditures should reflect the cost to households of the education service acquired during the reference period. The CPI scope includes the actual payments made during the period (upfront payment) plus fees for education services acquired during the period but deferred to be paid at a later date.

6.28 To align the household expenditure on tertiary education fees in the CPI, HELP expenditures were calculated using data from the Department of Education, Employment and Workplace Relations (DEEWR) on the total upfront and deferred fees and the number of HELP paying university students.

Financial services

6.29 Expenditure on financial services cannot be sourced from the HES as it was either not directly observable or the HES did not capture the transactions in sufficient volumes or detail. The financial services sub-group includes two expenditure classes: Deposit and loan facilities (direct charges) and Other financial services. Detailed information on Financial services in the 16th series CPI is contained in Appendix 3.

Deposit and loan facilities (direct charges)

6.30 Expenditure on Deposit and loan facilities (direct charges) was determined through the use of administrative data sets (obtained from financial institutions and government reporting agencies) of financial institution fees and charges for Australian households (detailed information on Financial services in the 16th series CPI is contained in Appendix 3).

Other financial services

6.31 Other financial services include real estate agent services, legal and conveyancing services, stockbroking services and taxes on property transfers.

6.32 Expenditure on real estate agent services was derived from property transaction data over the period 2009-10 and unpublished ABS survey data on real estate agent fees.

6.33 Expenditure on legal and conveyancing services was derived from the National Accounts ownership transfer costs. This represents a change from the 15th series which used ABS income data from Legal Practices, Australia, 2001-02 (cat. no. 8667.0).

6.34 National Accounts HFCE data was used to derive an estimate of expenditure on stockbroking services.

6.35 Expenditure on taxes on property transfers was compiled using data supplied by the State and Territory Revenue Offices.

6.36 The ABS will investigate methodologies for other significant financial services that are currently not covered in the CPI (e.g. superannuation charges) and introduce them into the CPI when the ABS is satisfied that the methodology and data are sufficiently robust to produce high quality estimates.

Revaluing expenditures to the link period

6.37 The expenditure weights derived from HES are based on expenditures in 2009-10. This new expenditure pattern was not introduced into the CPI until the June quarter 2011 (the link period). As the quantities underlying these expenditures had to be preserved, the expenditures were revalued to June quarter 2011 prices. The ABS does this by multiplying the 2009-10 expenditures by the ratio of its price index for the June quarter 2011 to the average of its quarterly price indexes for 2009-10.

Adjustments for quantity shifts

6.38 Ideally, the CPI weights should be as up to date as possible and be broadly representative of the expenditure pattern that might be expected over the life of the index series. Thus, when the June quarter 2011 link was being introduced, it was necessary to consider whether any developments and policy changes between 2009-10 and the June quarter 2011 might have significantly affected the expenditure pattern and whether any revalued expenditures needed to be adjusted.

6.39 There were no major policy changes identified during this period that would have significantly changed volumes between 2009-10 and the June quarter 2011.

6.40 Items where expenditures were likely to have changed between 2009-10 and the June quarter 2011 were also investigated. This was the case with 'Audio, visual and computing equipment'. The 2009-10 HES data provided the latest information on household expenditure on these items which was price updated to the June quarter 2011. However for Audio, visual and computing equipment, this approach may lead to underestimation of the weight in the CPI due to the relatively high volume growth in the quality (size and feature) of these high technology goods compared to other products in the CPI. Therefore, a volume increase of around 15% was calculated from the National Accounts HFCE components between 2009-10 and the June quarter 2011.

6.41 Another item where the expenditure changed between 2009-10 and the June quarter 2011 was 'Fruit'. The change was primarily due to steep price rises for bananas following crop damage caused by Tropical Cyclone Yasi. However no volume adjustment was made for bananas because the relative weight of the fruit component will return to normal levels when the price of bananas falls as supply increases.

6.42 In most cases the adjustments to expenditure were made without compensating adjustments to other expenditure in the CPI basket. The implication is that changes in such expenditure were assumed to have come from or gone into savings.


LOWER LEVEL WEIGHTS

6.43 Although the weights are expressed in terms of expenditure shares, it is not the expenditure shares (where expenditure is given by the product of quantity and price) that are held constant (or fixed) from period to period. What are held constant are the quantities of products underpinning these expenditures such as the number of litres of petrol purchased each period on average by households. Weights are presented in expenditure terms because it is not possible to present quantity weights in a meaningful way e.g. the quantity of health services. The relative expenditure shares of items will change over time in response to changes in relative prices.

6.44 While the implicit quantity weights are held constant at the expenditure class level, the weights of items within an expenditure class (e.g. different types of bread) can be varied between periodic reviews to reflect changed purchasing patterns. Any weight changes are introduced into the CPI in such a way as to not affect the level of the index.

6.45 Information from any reliable source is used to assess the importance of one commodity relative to another. Sources include data collections of the ABS and other organisations, and publications by industrial organisations. Information from the HES is also considered but, for the main part, is not sufficiently detailed or reliable at the lower levels of the CPI structure. For example, the HES data for types of appliances purchased would not be as reliable as industrial sales data because of the small samples in the HES.

6.46 At the price sample or elementary aggregate level, there are no explicit weights. Rather, the price samples are constructed so they are self-weighting. For example, if there were a price sample for medium chocolate bars, and the major grocery outlets had 80% of these sales and convenience stores 20%, then the price sample would be selected so that for every price from a convenience store there are four prices from the major grocery outlets.