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Feature Article - Analytical Living Cost Indexes for Selected Australian Household Types: An Update
TABLE 1: HOUSEHOLD TYPES
Table 2 shows per household average weekly expenditure during 1998-99 for each of the four household types, at June quarter 2000 prices. The commodity grouping used corresponds to the commodity groups used for the current (14th series) CPI.
Table 2 illustrates significant differences in expenditures, both in total and at the individual commodity group level. Although differences in incomes are likely to be a major reason, other factors such as the demographic make-up of the households and dwelling tenure would also play a part. For example, Age pensioner households have on average the lowest number of persons per household, being mostly one or two person households without children, while Employee and Other government transfer recipient households are more likely to include dependent children. In addition, the higher rate of outright home ownership among certain household types, such as Self-funded retiree and Age pensioner households, would also influence the nature of expenditures.
TABLE 2: ESTIMATED AVERAGE WEEKLY EXPENDITURE DURING 1998-99 BY COMMODITY GROUP
AND HOUSEHOLD TYPE AT JUNE QUARTER 2000 PRICES
In constructing price indexes, it is not the absolute expenditure levels but rather the expenditure shares (or weights) that matter. Table 3 presents the same data in expenditure share (or weight) form.
TABLE 3: EXPENDITURE WEIGHTS BY MAJOR COMMODITY GROUP AND HOUSEHOLD TYPE
AT JUNE QUARTER 2000 PRICES
There are some notable differences in the expenditure weights across the household types. For example the proportion of expenditure allocated to Food is highest for Age pensioner households, closely followed by Other government transfer recipient households. Employee households allocate a higher proportion of their expenditures to Transportation, Education and Miscellaneous (which includes interest charges) than the other household groups. Other government transfer recipients allocate higher proportions of their expenditures to Housing, Alcohol and tobacco and Communication than the other household types. Self-funded retiree households allocate higher proportions of their expenditures to Household furnishings and supplies, Health and Recreation than the other household types.
Further insight into the differences in expenditure patterns is provided in table 4. This table shows weights at the equivalent of the 14th series CPI expenditure class level for those expenditure classes where the differences in weights are most pronounced. The differences between household types again highlight demographic and other differences, some of which have been noted above.
TABLE 4: EXPENDITURE WEIGHTS FOR SELECTED EXPENDITURE CLASSES
AT JUNE QUARTER 2000 PRICES
When comparing differences in the behaviour of the aggregate indexes, the role played by differences in weights increases as the dispersion in the rates of price change increases. Over the period for which these indexes have been compiled there is substantial dispersion in the price movements of the expenditure classes. For example the CPI index for Hospital and medical services declined by 2.2% between the June quarter 1998 and the June quarter 2002 while the index for Tobacco increased by 43.0% and the index for Overseas holiday travel and accommodation increased by 24.7% over the same period.
The index series for the various household types from June quarter 1998 to June quarter 2002 are shown in chart 1 and quarterly percentage changes in the indexes in chart 2. The data on which the charts are based are provided in table 5.
Over the four-year period the indexes indicate there have been some differences in changes in living costs among the household types, with Employee households experiencing the lowest increase of 12.4% and Age pensioner households the highest increase of 14.0%. These outcomes compare with the increase in the CPI over the period of 13.7%.
TABLE 5: LIVING COST INDEXES AND THE CPI
The index results up to December quarter 2000 are very similar to those previously published. Up to that time Self-funded retiree households had shown the lowest increase in living costs and Other government transfer recipients the highest. Since December quarter 2000 some differences have continued to occur in the living cost experiences of the household types. Between December 2000 and June 2002, Employee households experienced the lowest rate of increase in living costs and Age pensioner households the highest rate. Changes in the price indexes at the CPI equivalent of the group level are presented in table 6 along with corresponding data for the CPI.
Differences in the price experiences of household types at the commodity group level reflect differences in expenditure weights at the lower levels, differences in weights at the state level3 and differences in prices faced by some household types. Some of these impacts are discussed below.
Between December quarter 2000 and June quarter 2002, the most noticeable variation in the living cost indexes was recorded for the Miscellaneous expenditure group. This commodity group includes interest charges and insurance. The reductions in interest rates on both home loans and consumer credit in conjunction with the greater weight interest charges have in the expenditures of Employee households, resulted in an overall fall of 4.1% in the index for Miscellaneous for these households. On the other hand, as Age pensioner and Self-funded retirees had little expenditure on interest charges, the rise in insurance prices delived a significant overall increase in prices for this commodity group for both these household types.
TABLE 6: CHANGE IN LIVING COST INDEXES BY COMMODITY GROUP,
DECEMBER QUARTER 2000 TO JUNE QUARTER 2002
Other government transfer recipient households experienced the highest increase in Alcohol and tobacco prices, reflecting their greater relative expenditure on tobacco products, which recorded much higher price increases than alcohol.
The higher increase in Recreation prices experienced by Self-funded retiree households in part reflects their greater relative expenditure on overseas travel and accommodation, with an increase in such prices of around 20% over this period.
In compiling the CPI, concession prices have been identified for those products for which they are considered important. In turn, these have been incorporated into the living cost indexes where appropriate, for each household type. The concession prices take various forms, such as a specified dollar reduction off the normal price (a practice often followed for local government rates) or a separately specified price. The practices of setting and adjusting these concession prices vary, and government policies may extend or reduce access to such concessions. As a result, changes in these prices can differ in their timing and magnitude to non-concession prices.
Differences in the movement of concessional prices compared to their non-concessional equivalents, can result in different household types experiencing different overall rates of price change. For example changes to concession phone call prices and the extension of the telephone line rental subsidy to Self-funded retiree households who qualify for a Commonwealth Seniors Health Card from September quarter 2001 contributed to the variation in price movements for Communications. In addition, concession priced local government rates and charges also showed a higher rise over this period than non-concession prices.
These analytical indexes have been designed specifically to answer the question:
“By how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services as purchased in the base period?”
In the earlier study covering the period June 1998 to December quarter 2000 it was concluded that the answer would appear to be broadly similar across the different household types. However, it was also noted that the results would not necessarily hold over all time periods.
The extension of the analysis to June quarter 2002 is generally consistent with those earlier conclusions, although perceptions as to what are significant differences may vary between analysts. Further, with the CPI recording an increase of 13.7% over the same period, it could be argued that the CPI provides a reasonable estimate of changes in living costs for each of the selected household types over this period.
Again it is cautioned that these indexes have been constructed to reflect the experiences of population groups as a whole, and they may not reflect the experiences of any individual household. In this regard it is particularly important to note that no such index can be expected to reflect the changes in living costs experienced by households as a direct consequence of their moving through the life cycle (e.g. as a result of family formation and ageing). However, it would be reasonable to say that these indexes do provide reliable estimates of the change in living costs of households at an equivalent point in the life cycle during each period.
For more information about Analytical living cost indexes, contact Bill Ferris on (02) 6252 6074 or email <firstname.lastname@example.org>.
The living cost indexes have been constructed by the ABS to meet a perceived requirement for this type of index. Details of the conceptual basis of the index and method of construction are provided in AEI June 2001.
LIVING COST OR INFLATION INDEXES
In brief, a living cost index is designed to assess changes over time in the after tax incomes of households. Therefore it is concerned with measuring the changes in 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.
In defining the item coverage of an inflation index such as the CPI, the starting point is the view that inflation is a phenomenon peculiar to the operation of markets. The item coverage is then defined as all those goods and services actually acquired by households in monetary transactions.
The most notable practical differences between the two types of indexes is that living cost indexes include interest charges but exclude house purchases, while inflation indexes exclude interest charges but include house purchases.
Insurance (other than health insurance) is also treated differently. In living cost indexes, the weight relates to the gross value of insurance premiums paid by households. In an inflation index, the weight 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).
In determining the household types for which these indexes would be produced, the ABS concluded that principal source of income4 represented the best means of defining household types for the purpose of measuring changes in living costs. The four household types for which these indexes have been constructed are:
The indexes for the selected household types have been produced only at the national level, although the CPI is produced for each capital city. For at least some household types the sample sizes in the HES are too small to produce reliable estimates of expenditure at the capital city level.
1 'Analytical Living cost Indexes for Selected Australian Household Types', Australian Economic indicators, June 2002 cat.
2 See Appendix for a discussion of the conceptual and methodological issues relevant to the construction of the measures.
3 The CPI is compiled from price indexes at the capital city level using expenditures by the CPI population in those cities as
weights. The state/territory expenditure weights for the living cost indexes have been derived by applying national average
expenditure estimates by household type to the estimated number of households in each state/territory.
4 A household’s principal source of income is defined as that income source which accounts for the largest proportion of total income. It is not necessary that the principal source accounts for a majority of household income. For example, if a household’s income is sourced 40% from wages and salaries, 35% from property income and 25% from an age pension, it would be classified as an Employee household.
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