Tag: cpi

A CPI Donut This Quarter

The Consumer Price Index (CPI) recorded no movement (0.0 per cent) in the March quarter 2019, according to the latest Australian Bureau of Statistics (ABS) figures. This follows a rise of 0.5 per cent in the December quarter 2018.

This just shows how far the real economy is from the CPI calculations, and the RBA is way off in its policy settings, and expectations!

The March quarter 2019 CPI was a result of price rises in a number of goods and services being fully offset by a number of price falls. This was consistent across most of the capital cities.

The most significant rises in the March quarter were vegetables (+7.7 per cent), secondary education (+4.2 per cent) and motor vehicles (+2.4 per cent). Drought and adverse weather conditions continue to reduce the supply of a selection of fruits and vegetables.

These rises were offset by falls in automotive fuel (-8.7 per cent), domestic holiday, travel and accommodation (-3.8 per cent) and international holiday, travel and accommodation (-2.1 per cent). Lower world oil prices at the end of 2018 saw automotive fuel prices fall 6.1 per cent in January, before rising in February and March, 4.2 per cent and 5.2 per cent respectively.

The CPI rose 1.3 per cent per cent through the year to the March quarter 2019, after increasing 1.8 per cent through the year to the December quarter 2018.

SYDNEY (-0.1%)

The main contributors to the fall in Sydney are automotive fuel (-8.6%), domestic holiday, travel and accommodation (-4.5%) and international holiday, travel and accommodation (-2.6%). Rents (-0.2%) also fell this quarter due to higher vacancy rates reflecting an increase in the supply of rental properties. The fall is partially offset by rises in vegetables (+9.1%), secondary education (+5.6%) and motor vehicles (+3.0%).


MELBOURNE (+0.1%)

The main contributors to the rise in Melbourne this quarter are vegetables (+7.5%), secondary education (+4.0%) and motor vehicles (+2.5%). The rise is partially offset by falls in automotive fuel (-9.1%) and new dwelling purchase by owner-occupiers (-1.2%). The fall in new dwelling purchase by owner-occupiers is due to increased competition as demand declines in the detached dwellings market.


BRISBANE (+0.1%)

The main contributors to the rise in Brisbane are vegetables (+8.1%), motor vehicles (+2.2%) and medical and hospital services (+1.8%). The rise is partially offset by falls in automotive fuel (-8.1%), domestic holiday, travel and accommodation (-6.0%) and international holiday, travel and accommodation (-2.0%).


ADELAIDE (+0.1%)

The main contributors to the rise in Adelaide this quarter are vegetables (+6.1%), pharmaceutical products (+4.2%) and fruit (+3.7%). The rise is partially offset by falls in automotive fuel (-7.8%) and domestic holiday, travel and accommodation (-3.1%).


PERTH (-0.1%)

The main contributors to the fall in Perth this quarter are automotive fuel (-8.8%) and domestic holiday, travel and accommodation (-5.5%). The fall is partially offset by rises in medical and hospital services (+1.4%), pharmaceutical products (+5.2%), vegetables (+4.8%) and secondary education (+2.6%).


HOBART (-0.2%)

The main contributors to the fall in Hobart this quarter are automotive fuel (-10.2%) and domestic holiday, travel and accommodation (-3.4%). The fall is partially offset by rises in rents (+1.6%), pharmaceutical products (+6.5%) and vegetables (+4.5%).


DARWIN (-0.8%)

The main contributors to the fall in Darwin this quarter are automotive fuel (-14.3%) and domestic holiday, travel and accommodation (-11.2%). The fall is partially offset by rises in vegetables (+7.5%), pharmaceutical products (+5.0%) and other financial services (+1.6%). The fall in domestic holiday, travel and accommodation is due to the low tourist season in Darwin.


CANBERRA (+0.1%)

The main contributors to the rise in Canberra this quarter are vegetables (+8.4%), medical and hospital services (+2.2%) and secondary education (+4.6%). The rise is partially offset by falls in automotive fuel (-9.4%) and domestic holiday, travel and accommodation (-4.1%).


CPI rose 0.5 per cent in the December quarter 2018

The ABS reports that the Consumer Price Index (CPI) rose 0.5 per cent in the December quarter 2018, which follows a rise of 0.4 per cent in the September quarter.

This means that inflation, on the official measures remains BELOW the RBA’s target range of 2-3%, at 1.8% and may suggest more of a bias towards cutting the cash rate (as we have been suggesting for some time).

Of course the “official” figures bear little resemblance to the real lived experience of many households – and the rental proxy for housing in the figures is understating the real expense of many with mortgages. In fact, one reason why the RBA policy levers look pretty sick is the fact that TRUE inflation in real households is closer to 3.5%, on average and for some even higher. They dropped the cash rate too far and now cannot recover.

The upshot is real net disposable income, after expenditure on necessities is all but shot for many, given the anemic wages growth. This explains why household financial confidence is falling away, as we reported before.

This is how the ABS broke the figures down.

The most significant rises in the December quarter are tobacco (+9.4 per cent), domestic holiday travel and accommodation (+6.2 per cent), fruit (+5.0 per cent), new dwellings purchased by owner-occupiers (+0.4 per cent) and furniture (+1.8 per cent). The rise is partially offset by falls in automotive fuel (-2.5 per cent), audio visual and computing equipment (-3.3 per cent), wine (-1.9 per cent) and telecommunications equipment and services (-1.5 per cent).

While automotive fuel rose 3.3 per cent in October, falls in November and December of 10.8 per cent and 5.0 per cent respectively resulted in a decrease across the quarter of 2.5 per cent.

The CPI rose 1.8 per cent through the year to the December quarter 2018, after increasing 1.9 per cent through the year to the September quarter.

ABS Chief Economist, Bruce Hockman said: “Annual growth in the CPI remains below 2 per cent in the December quarter 2018, with annual growth in tradables inflation of just 0.6 per cent, while non-tradables inflation rose 2.4 per cent. Over the past four years, annual growth in the CPI has only risen above 2 per cent in two of the past 16 quarters.”

Why The Consumer Price Index Is Flawed

From The Conversation.

Officially, Australia’s rate of inflation is 1.9%.

It’s the lowest it has been on a sustained basis since the 1950s and early 1960s.

But try to tell that to anyone and they will laugh at you, or worse.

The Bureau of Statistics is careful to say that the consumer price index isn’t a measure of living costs.

It creates that slightly differently, producing a collection of less-reported indexes that were updated this week.

On these measures, over the past year living costs have climbed 2% for households headed by an employee, 2.2% for households headed by Australians on most types of benefits, 2.3% for households headed by age pensioners, and also 2.3% for households headed by self-funded retirees.

The main difference between the consumer price index and the living cost indexes is that “living costs” include interest paid on mortgages whereas “consumer prices” do not.

Regardless, most of us would be pretty certain that even on these measures, what’s reported is too low.

We’re irrational

In part, this is because we are not rational. As Nobel Laureate Richard Thaler has pointed out, we often engage in “mental accounting”.

In general this means we notice losses more than gains. In this context, it means we focus more on the things that have gone up in price than on those that have gone down or remained unchanged.

Also, our mental basket of goods is generally not the same as the basket of goods the bureau measures, even though it should be.

It’s not our basket

Four times a year in multiple locations throughout each capital city the bureau attempts to collect information about the prices of the thousands of goods (and some services) that make the “basket” it thinks represent they typical household’s purchases.

The basket is divided into about 100 subgroups; things such as bread, milk, eggs, fruit, men’s footwear, women’s footwear, men’s clothes, women’s clothes, restaurant meals, electricity and so on.

Because it can’t price everything, it zeros in on a few representative items within each category.

For meat and fish the ABS includes beef sausages (1kg) and pink salmon (210g can). For processed fruit and vegetables it includes sliced pineapple (450g can) and frozen peas (500g pkt).

If you buy something different, the exact changes in the prices you pay won’t be fed into either the consumer price index or your living cost index, but the indexes are likely to move in line with your living costs in any case.

Things get left out

Many things are missing from the index, among them recreational drugs, gambling and prostitution.

Being bean counters, rather than priests, the bureau says it excludes these sorts of items on practical rather than moral grounds.

Gambling is excluded as it is difficult to establish the service or utility that households derive from gambling, and thus to determine an appropriate price measure. Recreational drugs and prostitution are both excluded as it is very difficult and indeed dangerous to obtain estimates of prices and expenditures, or to measure quality change.

Other things are excluded because their prices are deemed to be too volatile. The price of bank deposits and loans was removed from the main index a few years back.

And goods keep getting better

Where our views about prices are most likely to differ from the bureau’s is where goods get better.

The bureau factors quality improvements into the measures prices it reports. If, for instance, your next mobile phone costs as much as your last one but includes extra features such as more memory or an improved camera, the ABS will report that it has fallen in price.

This sort of adjustment for quality makes sense when adjusting down the price of a can of baked beans because it has been replaced by one slightly bigger, but is a grey area when it comes to improved features.

If the speed of the chip on your next laptop doubles, does that really mean the laptop is twice as good as the old one and should be said to have halved in price? Or should its price be recorded as having fallen by a lesser amount, or not at all seeing as the price hasn’t changed and it remains a standard laptop?

Often older models with lesser features are often no longer available. It’s impossible to buy a cheaper replacement.

The CPI is infrequent

The Reserve Bank is worried about the frequency of the index. It comes out only once a quarter, and up to a month after the quarter has finished.

Every developed country other than Australia and New Zealand releases its index monthly.

Given that the bank considers changing interest rates once every month, and given that the consumer price index is one of the two key measures it uses to guide its decisions (the other is the unemployment rate), a quarterly index leaves it somewhat in the dark and (when things are changing fast) potentially dangerously misled.

The bureau responds that it is prepared to release its index monthly, if it is paid to do it.

The ABS is persuaded there would be a significant benefit from more timely and responsive economic management if a CPI of equivalent quality to the current quarterly index were available monthly. Additional funding will be required to meet the costs involved in compiling a monthly index.

It’s just what we need – bureaucratic blackmail.

But it’s improving

On the positive side, new technologies have allowed more accurate price collection to make the index more precise. A key innovation is the rise of so-called “scanner data”, tracking expenditures at checkouts based on the prices people actually pay.

Scanner data has been used since 2014 and is now responsible for about one quarter of the prices reported. Field officers compile much of the rest using hand-held devices to type in prices they read off supermarket shelves.

The move to scanner data was spearheaded by the work of my UNSW School of Economics colleague Professor Kevin Fox.

There is a prospect of it becoming more widespread as more and more purchases are made with debit and credit cards and with point-of-sale software on devices such as tablets at coffee shops.

And important

Whether or not we like what it says, the consumer price index is important and lies behind much of what we do.

A whole range of government payments and duties are indexed to it – these change when the consumer price index changes. Benefits such as Newstart and family payments are indexed as are excise duties such as those on petrol and beer.

Even the private sector relies on the consumer price index to adjust payments under contracts such as rental agreements or construction charges.

Collecting it is an enormous and painstaking exercise.

Governments of both stripes would do well to remember that when next they think of cutting the bureau’s budget.

Author: Richard Holden Professor of Economics and PLuS Alliance Fellow, UNSW

The RBA On Inflation

RBA Deputy Governor Guy Debelle spoke on Inflation. He looked at the trends, and also the segmental breakup.  We will look at the first part of the speech where he discussed the overview and then dive into the housing related elements.

We continue to hold the view that the official measure has very little to do with the real exp[experience of many households.

The inflation rate is currently just over 2 per cent (Graph 1). This is consistent with the inflation target for the Reserve Bank agreed between the Governor and the Treasurer. However, that follows a period where inflation has been a little below target for a number of quarters. While inflation has averaged 2½ per cent since the inflation target was introduced, over the past three years it has averaged 1.8 per cent (Table 1).

Graph 1
Graph 1: Inflation

 

How broad based has the recent decline in inflation been? In 2016, only around one-quarter of the CPI basket had an inflation rate of above 2.5 per cent. In the June quarter this had risen but only to 40 per cent. To look at it another way, in recent quarters around 80 per cent of the basket had an inflation rate below its inflation-targeting average (Graph 2).

Graph 2
Graph 2: CPI Basket

 

There are a number of macroeconomic forces at work that have contributed to these outcomes, but today I am going to focus on some of the individual price developments that underpin the aggregate inflation outcome. I will examine pricing dynamics at a more disaggregated level and how these dynamics have changed in recent years. An understanding of these changing dynamics and what might be behind them is useful in assessing the outlook for inflation. Important drivers of recent lower outcomes include competition in the retail sector, historically low increases in rents, low wages growth and slower growth in some administered prices.

Table 1: Inflation by Component(a)
Effective weight Average since 1993 Average since 2015
Retail 30 1.2 −0.1
Consumer durables(b) 15 0.1 −0.8
Food(c) 7 2.4 −0.1
Fruit and vegetables 2 3.2 1.1
Alcoholic drinks 4 2.7 1.6
Non-alcoholic drinks 1 2.3 −0.5
AVC and telecommunications equipment 4 −2.8 −4.7
Housing(d) 17 3.0 1.9
New dwelling purchase 8 3.5 2.8
Rents 7 2.9 0.7
Dwelling maintenance and repair 2 2.2 2.2
Administered prices 19 4.4 3.8
Utilities 4 4.5 4.2
Education 4 5.1 3.2
Health 5 4.3 4.0
Other administered 5 4.0 3.6
Market services(e) 18 2.9 2.0
Tobacco 3 8.4 13.9
Automotive fuel 3 3.3 6.7
Holiday travel and accommodation 6 2.2 0.8
Headline CPI(f) 100 2.5 1.8
Trimmed mean(f) 70 2.6 1.8
(a) Adjusted for the tax changes of 1999-2000
(b) Excludes audio, visual and computing equipment
(c) Excludes fruit, vegetables, meals out and takeaway food
(d) Excludes administered prices
(e) Excludes domestic travel and telecommunications equipment and services
(f) Excludes interest charges and indirect deposit and loan facilities
Sources: ABS; RBA

 

Housing

The cost of housing services has a large weight in the CPI, with the weight about equally split between the cost of building a new home and the cost of renting (Graph 8). There have been quite divergent dynamics in each of these two components in recent years.

Graph 8
Graph 8: Housing Cost Inflation

New dwelling costs

New dwelling cost inflation, which has an 8 per cent weight in the CPI basket, has tended to move closely with the residential building cycle over time (Graph 9). However, despite the historically high level of activity in housing construction over recent years, new dwelling cost inflation has been running at a bit below its long-run average. During the late 2000s, new dwelling cost inflation was higher than it is currently because the residential construction sector was competing for materials and labour with the resources sector in the midst of its investment boom. This competition for inputs has clearly abated. Wages growth in housing construction has been generally contained except for some particular skills such as bricklayers, in part because workers have been moving from the resources sector as projects there finished and also reflecting the general slow pace of wages growth in the economy. Reports from liaison suggest that competition for inputs between public infrastructure projects and high-rise residential developments has put some upward pressure on new dwelling cost inflation in Sydney and Melbourne. This includes competition for labour such as engineers and project managers, as well as competition for materials such as concrete. Liaison contacts suggest that firms have also been able to limit cost inflation by switching to lower-cost building materials.

Graph 9
Graph 9: New Dwelling Inflation and Building Costs

Rents

The pace of rent inflation has been falling since 2008, and year-ended rent inflation is around its lowest level since the mid 1990s. This has been a considerable drag on inflation: rental inflation was nearly 3 percentage points lower per annum in the past three years than in the previous twenty, which has reduced aggregate inflation by nearly 0.2 percentage points per annum in recent years.

The decline in rent inflation can be attributed to a mix of supply and demand side developments. As mentioned, housing construction activity has grown strongly in recent years, which has increased the supply of rental properties. Growth in the housing stock has outstripped population growth since 2014, which put downward pressure on rents.  Furthermore, rents are changed relatively infrequently and can be indexed to CPI inflation, so there is a self-reinforcing dynamic to this too.

The national rent inflation series masks considerable variation across capital cities. Rent inflation has been much lower in Perth than in other capital cities in recent years, indeed rents have been falling in Perth at quite a rapid rate for a number of years. The vacancy rate in Perth – that is, the share of properties that are vacant and available to rent – has more than doubled since 2008.

But slower growth in rents is not just a Perth story. Rent inflation in Sydney and Melbourne has slowed considerably in recent years reflecting the substantial additions to the dwelling stock in these cities, and notwithstanding the faster population growth, particularly in Melbourne. Rents are flat in Brisbane and Adelaide. Only in Hobart are rents growing at a high rate.

We expect the pace of rent inflation to increase gradually over the next couple of years. The vacancy rate has declined over the last year, and newly advertised rent growth has increased. However, it will take some time for the flow of new rents to materially affect the stock of rents captured in the CPI.

Graph 10
Graph 10: Rent Inflation and Vacancy Rate
Graph 11
Graph 11: Rent Inflation

Costs Of Living Rise 2.1% Over Past Year

The latest CPI data from the ABS today for June 2018 shows that the Index (CPI) rose 0.4 per cent in the June quarter 2018, according to the latest Australian Bureau of Statistics (ABS) figures. This follows a rise of 0.4 per cent in the March quarter 2018.

The most significant price rises this quarter are automotive fuel (+6.9 per cent), medical and hospital services (+3.1 per cent), and tobacco (+2.8 per cent). These rises are partially offset by falls in domestic holiday travel and accommodation (-2.7 per cent), motor vehicles (-2.0 per cent) and vegetables (-2.9 per cent).

In annual terms,  transport rose 5.2%, and tobacco by 7.8%. The annual rate was 2.1%, having increased 1.9 per cent through the year to March quarter 2018. Most of this annual growth is due to strength in fuel, electricity and tobacco.

For the June quarter 2018, the All Groups annual percentage change of the Weighted Average of the Eight Capital Cities is +2.1 per cent. Sydney rose 2.1 per cent, Melbourne rose 2.5 per cent, Brisbane rose 1.7 per cent, Adelaide rose 2.7 per cent, Perth rose 1.1 per cent, Hobart rose 2.4 per cent, Darwin rose 1.2 per cent, and Canberra rose 2.8 per cent.

In fact, this is a weak result, the trimmed mean falls below the lower bounds of the RBA target at 1.9%. Yet in some categories households are reporting BIG rises in costs of living. Electricity, Fuel, Health Care costs are bearing down – and frankly the CPI does seem disconnected from the real life experience of many.

Costs are still outpacing income growth, for many households, so net, net they are going backwards, still.

Petrol prices stable to March, but now hitting four-year highs

According to the ACCC, Drivers feeling the pinch of high petrol prices should use price cycle information and fuel price websites and apps to shop around, as petrol prices in some cities reached their highest levels in almost four years in May.

Average petrol prices in Australia’s five largest cities (Sydney, Melbourne, Brisbane, Adelaide and Perth) remained broadly stable in the March quarter 2018, according to the ACCC’s latest quarterly petrol report, released today.

However since April, growing concerns about risks to global crude oil supplies have caused international oil prices, and local retail petrol prices, to jump dramatically, peaking in May.

“Consumers have recently been paying around $1.60 for petrol. These prices are higher than any time since mid-2014 in some cities,” ACCC Chairman Rod Sims said.

“Unfortunately, the international factors pushing up wholesale petrol prices mean that these higher prices are being passed on to Australian motorists at the petrol bowser.”

The ACCC reports the increase in retail petrol prices since the March quarter 2018 has been influenced by a number of factors, including the agreements in late-2016 by the Organisation of Petroleum Exporting Countries (OPEC) cartel and some other producing countries to cut crude oil production.

This has been compounded by recent concerns about risks to international crude oil supplies including: a potentially spreading conflict in the Middle East; renewed US sanctions against Iran; and falling crude oil output due to the political and economic crisis in Venezuela.

“With prices reaching four-year highs, it’s more important than ever that consumers who can, take advantage of the fuel websites and apps freely available to find the cheapest petrol prices in their area,” Mr Sims said.

“For example, yesterday lunchtime, the available fuel websites and apps indicated that the range between the highest and lowest priced sites was over 20 cents per litre (cpl) in Sydney and Adelaide, around 15 cpl in Brisbane and Perth and around 10 cpl in Melbourne.”

“While consumers cannot do much about rising international prices, they can shop around to find their lowest local price. Our first industry report showed that retailers’ prices are not the same—retailers do price differently and have different strategies to get you to fill up with them.”

The March quarter report noted that a couple of fuel price data providers announced high consumer use of their services in the quarter. In January, the Western Australian Government announced that in December 2017 the FuelWatch website reached a record of over a million hits, which was the highest number of monthly hits since its inception in 2001.

In March, 7-Eleven announced that over one million people had downloaded its fuel app since its launch in 2016.

“There are plenty of apps consumers can download for free that tell them where the cheapest petrol is in their area. We encourage consumers to use these apps, along with the analysis and reports about fuel prices, to shop around and find the best deals,” Mr Sims said.

The March quarter report also found that average gross retail margins in the five largest cities in the March quarter 2018 were 12.4 cents per litre (cpl), a decrease of 1.8 cpl from the previous quarter. However, they remain 4.4 cpl above their real long-term average since the ACCC began monitoring them in the September quarter 2002 (8.0 cpl).

Petrol prices in Brisbane remained the highest of the five largest cities in the March quarter 2018. The quarterly average retail petrol price in Brisbane was 138.2 cpl, which was 3.4 cpl higher than the average across the other four largest cities.

CPI Mixed, Housing Up

The latest ABS data, out today shows that the Consumer Price Index (CPI) rose 0.4 per cent in the March quarter 2018, the latest Australian Bureau of Statistics (ABS) figures reveal. This follows a rise of 0.6 per cent in the December quarter 2017.

The CPI rose 1.9 per cent through the year to the March quarter 2018 having increased 1.9 per cent through the year to the December quarter 2017. Housing was more than 3% over the past year and health costs more than 4%.

The most significant price rises this quarter are secondary education (+3.3%), gas and other household fuels (+6.0%), pharmaceutical products (+5.6%), vegetables (+3.7%) and medical and hospital services (+1.5%). These price rises were partially offset by falls in international holiday travel and accommodation (-2.4%), audio, visual and computing media and services (-6.1%) and furniture (-2.8%).

Looking across the states, the 1.9% average masks significant variations, with Sydney and Melbourne above 2% and Canberra 2.4%.

For the March quarter 2018, the All Groups annual percentage change of the Weighted Average of the Eight Capital Cities is +1.9 per cent. Sydney rose 2.1 per cent, Melbourne rose 2.2 per cent, Brisbane rose 1.7 per cent, Adelaide rose 2.3 per cent, Perth rose 0.9 per cent, Hobart rose 2.0 per cent, Darwin rose 1.1 per cent, and Canberra rose 2.4 per cent.

We think “real life” prices increases are significantly higher, due to the impact of housing and health costs in particular.

 

US Inflation Up 0.5% In January

More evidence of inflation lurking in the US economy, as the headline rate for January was higher than expected. This gives more support to the view the FED will indeed lift interest rates.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.

The seasonally adjusted increase in the all items index was broad-based, with increases in the indexes for gasoline, shelter, apparel, medical care, and food all contributing. The energy index rose 3.0 percent in January, with the increase in the gasoline index more than offsetting declines in other energy component indexes. The food index rose 0.2 percent with the indexes for food at home and food away from home both rising.

The index for all items less food and energy increased 0.3 percent in January. Along with shelter, apparel, and medical care, the indexes for motor vehicle insurance, personal care, and used cars and trucks also rose in January. The indexes for airline fares and new vehicles were among those that declined over the month.

The all items index rose 2.1 percent for the 12 months ending January, the same increase as for the 12 months ending December. The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 5.5 percent and the food index advanced 1.7 percent.

CPI Still Subdued, But Housing A Pressure Point

The Consumer Price Index (CPI) rose 0.6 per cent in the December quarter 2017, the latest Australian Bureau of Statistics (ABS) figures reveal. Annual inflation in most East Coast cities rose above 2.0 per cent, due in part to the strength in prices related to Housing.

This follows a rise of 0.6 per cent in the September quarter 2017. However, there were some changes in methodology which may have impacted the results.

The most significant price rises this quarter are automotive fuel (+10.4%), tobacco (+8.5%), domestic holiday travel and accommodation (+6.3%) and fruit (+9.3%). These price rises were partially offset by falls in international holiday travel and accommodation (-1.7%), audio visual and computing equipment (-3.5%) and telecommunication equipment and services (-1.4%).

The CPI rose 1.9 per cent through the year to December quarter 2017 having increased 1.8 per cent through the year to September quarter 2017.

Chief Economist for the ABS, Bruce Hockman, said “While the annual CPI rose 1.9 per cent, annual inflation in most East Coast cities rose above 2.0 per cent, due in part to the strength in prices related to Housing. Softer economic conditions in Darwin and Perth have resulted in annual inflation remaining subdued at 1.0 and 0.8 per cent respectively.”

The ABS periodically reviews the CPI expenditure weights to ensure they are representative of household spending patterns on goods and services. This quarter the ABS has introduced new expenditure weights based on information sourced from the ABS Household Expenditure Survey.

In addition, this quarter the ABS has also implemented methodological changes to maximise the use of transactions data to compile the CPI. Implementation follows a period of extensive research and expert peer review, including from Professor Kevin Fox of UNSW Sydney. Professor Fox said “I strongly support the ABS decision to implement new CPI methods for the treatment of transactions data. The ABS has made a convincing case for implementation following an extended period of research. These new methods will enhance the accuracy of the Australian CPI, provide additional analytics and better inform policy formulation.”

ABS Revises CPI Weightings, Will They Lead the Measure Lower?

The Australian Bureau of Statistics has now released their paper which describes the changes that will be made to the Consumer Price Index (CPI) and Selected Living Cost Indexes (SLCIs) as a result of the introduction of the 17th series expenditure patterns.

There are quite a number of technical changes, as well as different weights for specific items. Housing and power costs for example will be higher. From 2018, the CPI will be re–weighted annually in December quarters

This is likely to lead to a lower headline CPI rate, perhaps by around 0.25% or more (DFA estimate), though there are various offsetting adjustments, so we cannot be sure.  More noise in the numbers!

The first publications based on the 17th series will be in respect of the December quarter 2017, which are due to be released on 31 January 2018 (CPI) and 7 February 2018 (SLCIs).

Australia has produced indexes of retail price inflation going back as far as 1901. Prior to the introduction of the CPI in 1960, there were five series of retail price indexes compiled by the (then) Commonwealth Bureau of Census and Statistics. Since 1960, the Australian Bureau of Statistics (ABS) has maintained a program of periodic reviews of the CPI to ensure that it continues to meet community needs. The main objective of these reviews is to update the household expenditure information used to set the item weights in the CPI, but they also provide an opportunity to reassess the scope and coverage of the index.

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 17th series. These indexes are produced as a by-product of the CPI, with weights also derived from the Household Expenditure Survey (HES).

The 17th series review is a minor review of the CPI and SLCIs, consisting of an update of the upper level (expenditure class) weights in line with the latest HES, and a simple examination of structures and methodologies.

This information paper provides an overview of the changes to the CPI and SLCIs that will be introduced with the 17th series from the December quarter 2017. It describes the household expenditure data used to calculate the weights and the ways in which some of the data have been adjusted to align with CPI and SLCI requirements. The paper also presents the updated weighting patterns and some background on the major shifts in weights between the 16th and 17th series. There are no changes to the classification structure or publications in respect of the 17th series.

They also continue to explore options for a more frequent and timely monthly measure.