Introduction of the Consumer Price Index weight update, 2019

The purpose of this information paper is to present the 2019 weight update for the Consumer Price Index (CPI) and Selected Living Cost Indexes (SLCIs). The 2019 update will be in respect of the December quarter 2019, which are due to be released on 29 January 2020 (CPI) and 5 February 2020 (SLCIs).

The Australian Bureau of Statistics (ABS) has traditionally updated the CPI weights in line with the release of the ABS’s Household Expenditure Survey (HES). The first annual re-weight of the CPI was in 2018. The 2019 weight update again predominately uses Household Final Consumption Expenditure (HFCE) data available from the National Accounts. This approach enables the CPI to be re-weighted on an annual basis, as outlined in the information paper An Implementation Plan to Annually Re-weight the Australian CPI. HES data will still be used to calculate weights for the years it is available.

The SLCIs, incorporating the Pensioner and Beneficiary Living Cost Index (PBLCI) and the Analytical Living Cost Indexes (ALCIs), have also been reviewed as part of the 2019 update.

This information paper provides an overview of the changes to the CPI and SLCIs that will be introduced with the 2019 update and presents the updated weighting patterns. Included in this information paper is the CPI explainer: Quality Change in the Australian CPI.

Readers requiring further information should contact:

Consumer Price Index Section
Australian Bureau of Statistics
PO Box 10
BELCONNEN ACT 2616
Telephone: 02 6252 6654
Email: prices.statistics@abs.gov.au

David Gruen
Australian Statistician

The ABS first compiled the CPI in 1960 with the series extended back to 1948. Prior to introducing the CPI, from 1901 to 1960, the ABS produced a number of discrete retail price indexes, each constructed with fixed quantity weights, spanning different lengths of time – for more detail see chapter 3 of Consumer Price Index: Concepts, Sources and Methods.

The introduction of the CPI heralded a different approach to constructing price indexes. Rather than compiling a set of discrete fixed-weighted indexes, the objective became to produce a series of short-term fixed-weighted indexes that were to be regularly linked (or chained) together to provide a single continuous measure of price change. This strategy was adopted to ensure that, at any point in time, the weighting patterns and item coverage of the CPI were relevant to user requirements and reflected contemporary economic conditions as accurately as possible. As a result, the ABS has maintained a program of periodic reviews of the CPI to ensure that it continues to meet community needs.

Traditionally, these reviews have coincided with the release of the ABS’s Household Expenditure Survey (HES), which is currently conducted every six years. In recent years, the ABS has undertaken a program to enhance the CPI (ABS, 2015). Part of this program included the use of alternative data sources to more frequently update the CPI weights. Following investigations in 2016, the CPI will be re-weighted annually using the methods outlined in the information paper Increasing the Frequency of CPI Expenditure Class Weight Updates.

This latest information paper summaries the data sources and methods to annually re-weight the CPI and SLCIs; and presents the 2019 weights.

The updated weights will be implemented in the December quarter 2019 publications of the CPI and SLCIs, to be released on 29 January 2020 and 5 February 2020 respectively.

The most recent Household Expenditure Survey (HES) was conducted in 2015-16 and provided information on the spending patterns of Australian households for the CPI 17th series, which was implemented in the December quarter 2017. When it’s available, the HES remains the primary data source for the CPI and SLCI weights. Following the 17th series review, data from the National Accounts is used to update the CPI and SLCIs weights until data from the 2021-22 HES is available in 2023.

The main data source for the 2019 CPI and SLCI weight update is Household Final Consumption Expenditure (HFCE) data from the National Accounts. Conceptually, the measurement of HFCE closely aligns with the HES. HFCE data captures household expenditure by Australian households only and excludes expenditure by non-residents in Australia.

HES is a significant data source for both the CPI and HFCE. In compiling HFCE data, additional data from sources such as the Retail and Wholesale Industries (cat. no. 8622.0) and the Economic Activity Survey are incorporated to produce an annually updated series.

While HFCE is the main data source for updating the CPI for the inter-HES years, 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
• Mortgage interest charges (only included in the SLCIs)
   

For more information on the data sources used for these components 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 has many benefits for inflation statistics. The primary benefit is more up-to-date weights enhance 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.

As part of earlier investigations by the ABS, an empirical assessment was also conducted (see ABS, 2016). Experimental price indexes using weights derived from HFCE data were produced between 2005 and 2015 to compare the annually re-weighted series with the existing CPI series. The results revealed that the experimental HFCE series reported lower average annual household inflation measures relative to the CPI. This supported the theory that higher frequency (annual) re-weighting at the CPI EC level captures a greater amount of consumer substitution when compared to the current CPI (six yearly) re-weighting process.

• For the 2019 update, movements in the HFCE data for the years 2016-2017 to 2017-2018 have been used. The approach for the 2019 update to re-weight the CPI and SLCIs can be summarised as follows:
• 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)).
• 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 that has been aligned to the same concepts and scope of the CPI and SLCIs.
• Calculate movements from 2016-17 to 2017-18 for the ‘HFCE aligned’ data from step (ii), and apply these movements to each CPI EC to update the expenditure values.
• Price update the 2017-18 expenditure values for each CPI EC to the September quarter 2019.
• Re-scale the price updated expenditure values across all CPI ECs so they sum to 100.0 (i.e. expenditure shares).

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

One thing to note when comparing the weights between 2018 and 2019 is the fact 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.

For example, if the increase in expenditure for a particular EC in the reference period is greater than the increase in total expenditure (in percentage terms), the weight for that EC will increase. Conversely, if the increase in expenditure for a particular EC in the reference period is less than the increase in total expenditure, the weight for that EC will decrease.

For the CPI, households continue to spend the most on Housing (22.93%), followed by Food and non-alcoholic beverages (15.75%) and Recreation and culture (12.81%).

Notable changes in the CPI weights are discussed in more detail below. All analysis refers to the weighted average of the eight capital cities.

The weight for Food and non-alcoholic beverages had a minimal weight change, decreasing by 0.01 percentage points (pp) to 15.75%. Fruit and vegetables recovered from flooding in 2017 in some growing regions which caused prices to ease back to normal levels resulting in a lower expenditure share. The weight for packaged products fell reflecting ongoing competition between supermarkets which saw price falls, and therefore a lower expenditure share. Wheat-based products, such as bread and cereals, and meat products rose in weight reflecting adverse weather conditions as well as international demand, resulting in a higher expenditure share for these products.

The weight for Alcohol and tobacco increased by 0.35pp in 2019 to 7.71%. The main contributor to the increase was Tobacco, which increased 0.35pp. The continued rise in the tobacco excise tax rate has resulted in higher prices and subsequently a higher expenditure share.

Housing remains the largest component of household spending, with a weight of 22.93%, decreasing by 0.26pp.

The weight for Rents decreased by 0.26pp to 6.84%. This reflected subdued price growth due to increased supply of rental properties and higher vacancy rates in some capital cities.

New dwelling purchase by owner-occupiers remains a major component of housing expenditure and is still the most heavily weighted EC in the CPI. The weight decreased by 0.21pp to 7.84% due to weak price growth and slowing residential construction activity during 2017-18.

The main offset to the Housing group’s decrease was Utilities, which increased by 0.14pp to 4.63%. This was driven by both Electricity and Gas and other household fuels which saw price rises in some capital cities, leading to an increase in household expenditure.

The weight for Furnishings, household equipment and services decreased by 0.33pp to 8.56%. The main contributor was Child care which fell 0.06pp. The fall in the weight for Child care reflects the price fall from the New Child Care Subsidy which was introduced in July 2018. A range of household goods also fell in weight reflecting the continued strong retail competition.

Health recorded an increase in weight of 0.19pp to 5.88%. The annual rise in private health insurance premiums was the major contributor to the increase in weight for Medical and hospital services, which rose 0.16pp to 4.16%.

The weight for Transport rose 0.20pp to 10.68%. The main driver was Automotive fuel, which recorded an increase in weight of 0.33pp to 3.57%. A lower Australian dollar and higher world oil prices impacted domestic automotive fuel prices.

Motor vehicles recorded a fall in weight of 0.10pp to 2.46% due to weakness in motor vehicle sales over this period.

This release previously used catalogue number 6470.0.55.002.