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 2015-16 Household Expenditure Survey (HES).


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

6 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.

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.

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 approach: changes in the prices of goods and services acquired (actually received)
• Cost of use approach: changes in the prices of goods and services used (consumed)
• Outlays approach: 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 approach. The SLCIs have 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 SLCIs, 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 SLCIs therefore exclude the net purchase of housing and the increase in volume of housing due to renovations or extensions.

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

15 Financial services are treated differently in the SLCIs. The SLCIs 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).

16 The Selected Living Cost Indexes are published at the national level only.


METHODOLOGY

17 Construction of the SLCIs is essentially undertaken in three stages. Stage one is concerned with calculating weights representative of the expenditure patterns of the defined household types. Stage two involves identifying appropriate measures of price change for each of the expenditure weights. The third and final stage is to use the weights to aggregate or average the price change measures.

18 From the December quarter 2018, the expenditure weights for all household types are now updated annually. The Household Expenditure Survey (HES) is used in the years where it is available, currently six-yearly. In inter-HES years, Household Final Consumption Expenditure (HFCE) data from the National Accounts is used as the primary data source for updating the weights. This is consistent with the approach used for the CPI.

19 The SLCIs are published as totals for Australia only. The current weighting patterns for the SLCIs are published in Information Paper: Introduction of the Consumer Price Index Weight Update, 2018 (cat. no. 6470.0.55.002).

20 The measures of price change, with the exception of those for interest charges, are sourced from the CPI. Most item price indexes are 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.

21 Some item price indexes are 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.

22 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.

23 Price measures for interest charges are collected separately by the ABS on a basis comparable with those employed in the CPI prior to the September quarter 1998.

24 From the September quarter 2012, the SLCIs, 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

25 The LCIs for employee, age pensioner, other government transfer recipient and self-funded retiree households are constructed using five sets of weights. The first set of weights, based on the 1993-94 HES, is 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, is 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, is 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, is used to construct the indexes from the September quarter 2011 to the September quarter 2017. The fifth set of weights, based on the 2015-16 HES, is used to construct the indexes from the December quarter 2017 to the September quarter 2018. The sixth set of weights, based on 2016-17 HFCE data from the National Accounts, is used to construct the indexes from the December quarter 2018 onwards.

26 The index for the PBLCI population subgroup is constructed using three sets of weights. The first set of weights, based on the 2003-04 HES at the national level, is 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, is used to construct the PBLCI from the September quarter 2011 to the September quarter 2017. The third set of weights, based on the 2015-16 HES at the weighted average of the eight capital cities level, is used to construct the PBLCI from the December quarter 2017 to the September quarter 2018. The fourth set of weights, based on the 2016-17 HFCE data from the National Accounts, is used to construct the indexes from the December quarter 2018 onwards.


EXPENDITURE PATTERNS OF THE SELECTED HOUSEHOLD TYPES

27 The SLCI weights reflect the relative expenditures of the SLCI population subgroups as a whole. The weights reflect average expenditure of households and not the expenditure of an 'average household'. The SLCI weights for the SLCI groups are shown in Table 1.

TABLE 1: 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	18.45	16.54	19.44	17.72	15.84	15.76
Alcohol and tobacco	8.33	7.82	5.98	10.31	7.29	7.36
Clothing and footwear	3.29	3.51	3.05	3.48	2.77	3.32
Housing(c)	23.65	14.98	20.29	26.52	12.35	23.19
Furnishings, household equipment and services	8.37	9.31	9.12	7.80	9.68	8.89
Health	7.04	5.67	10.48	4.01	10.81	5.69
Transport	9.22	10.43	9.73	9.08	10.71	10.48
Communication	3.57	2.63	3.35	3.53	2.91	2.57
Recreation and culture	9.54	12.99	11.13	8.14	20.70	12.60
Education	1.81	4.28	0.16	3.21	1.18	4.27
Insurance and financial services(d)	6.70	11.85	7.26	6.20	5.75	5.86
All groups	100.00	100.00	100.00	100.00	100.00	100.00
(a) Based on 2016-17 Household Final Consumption Expenditure (HFCE).
(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.

28 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 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 and alcohol and tobacco 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

29 The SLCIs 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.