6401.0 - Consumer Price Index, Australia, Mar 2017 Quality Declaration 
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 02/06/2017   
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Potential Impact of Tropical Cyclone Debbie on the CPI
This analysis has been undertaken by Mehnaz Baten, from the Consumer Price Index Section of the ABS


INTRODUCTION

In late March 2017, a category four tropical cyclone known as Tropical Cyclone Debbie crossed the North Queensland coast. Strong wind and storm surges caused significant damage to areas in the storm’s path. Subsequent flooding affected regions across Queensland and northern parts of New South Wales. Severe damage was reported across the affected regions to property, agricultural produce and popular tourist destinations.

Weather events like Tropical Cyclone Debbie are likely to impact the prices of some goods and services consumed by households. The prices paid for the goods and services households acquire are regularly measured by the Australian Bureau of Statistics (ABS) and are used to compile the Australian Consumer Price Index (CPI).

This article focuses on the potential impact of Tropical Cyclone Debbie on selected components of the CPI. The analysis draws on a variety of data sources and past experiences; including the impact on prices of Tropical Cyclone Yasi in 2011.


IMPACT ON SELECTED CPI COMPONENTS

Agricultural Produce

The gross value of agricultural production in Queensland was estimated to be $11.9 billion in 2014-2015 (ABS cat. no. 7503.0), accounting for 22 per cent of the total gross value of agricultural production in Australia. Tropical Cyclone Debbie has significantly impacted agricultural crops with sugarcane, tomato and capsicum production most affected.

Several key sugarcane growing regions were impacted by the cyclone, including the Whitsundays, Mackay, Burdekin and Proserpine. Queensland is estimated to produce 95 per cent of Australia’s raw sugar, with 85 per cent being exported. Approximately half of Queensland's cane crop farms were in the path of the cyclone, with estimated losses being around $150 million. This is in contrast to Tropical Cyclone Yasi which saw damage to cane crops estimated to be worth approximately $500 million. Due to Australia's significant role in the export market of raw sugar, and the more severe extent of damage resulting from Tropical Cyclone Yasi, world sugar prices rose almost 4 per cent in 2011, reaching their highest level in 30 years. In the CPI, sugar rose 6 per cent in the June quarter 2011 due to sugar shortages. Based on this analysis, it is expected that Tropical Cyclone Debbie's influence on sugar prices will be less significant in coming quarters when compared to Tropical Cyclone Yasi.

In 2014-15 Queensland accounted for approximately 24 per cent of Australian vegetable-growing farms (ABARES 2017) with tomatoes, capsicums, green beans, eggplants, cucumbers, corn and pumpkins being the main vegetables produced in these regions.

Tropical Cyclone Debbie caused damage to several key vegetable growing regions in Queensland. Bowen, one of the largest winter cropping regions, was severely affected. Bowen’s vegetable industry damage is estimated to be around $100 million, with the main affected crops being tomatoes, capsicums, melons, beans, eggplants, pumpkins and zucchinis. Production of fruits such as mangoes has also been affected. In addition to the direct impact, the damage to equipment, machinery, infrastructure and roads will also have an indirect impact on the production and prices of fruit and vegetables.

Fruit and vegetables account for 15.5 per cent of household spending in the Food and non-alcoholic beverages group in the CPI. A significant disruption in their supply is expected to see prices increase, which will be reflected in the CPI. In 2011 when Tropical Cyclone Yasi struck North Queensland, an estimated $300 million loss in damaged crops was recorded. Tropical Cyclone Yasi had a major impact on the supply of fruit and vegetables. In particular the cyclone affected 75 per cent of banana crops in Queensland, resulting in a rise of over 400 per cent in the price of bananas over the twelve months to June 2011. This saw an increase of fruit prices in the CPI of over 60 per cent compared to the previous year (see figure 1).


FIGURE 1: PRICE GROWTH FOR BANANAS AND FRUIT EXPENDITURE CLASS
FIGURE 1: PRICE GROWTH FOR BANANAS AND FRUIT EXPENDITURE CLASS


Tropical Cyclone Debbie saw tomato and capsicum producers most affected. Price changes for these vegetables in coming quarters will be reflected in the Vegetables expenditure class of the CPI. In the subsequent periods the ABS will also be analysing household expenditure on these items. The availability of detailed information by item from Australian retail businesses will enable a clear understanding of prices and the level of consumption for each item. This detailed information enables the ABS to identify and assess temporary supply shocks and consumers responses to price changes.

Tourism

Tropical Cyclone Debbie damaged some of Australia’s most popular tourist destinations including the Whitsunday Islands (home of Hamilton Island and Daydream Island), Airlie Beach and Mackay. In addition to this, substantial damage has been reported for tourist accommodation and infrastructure (boats, ferries). Domestic holiday travel and accommodation accounts for 2.6 per cent of household spending in the CPI. In the short term, it is expected that there will be some negative impact on the domestic demand for travel and accommodation in the affected regions impacting the prices of these services. However, it is anticipated that tourism will recover over time in the affected regions. In 2011 Tropical Cyclone Yasi had a negligible impact on the Domestic holiday travel and accommodation series in the CPI. Similarly, Tropical Cyclone Debbie is expected to have a negligible impact on the CPI for the Domestic holiday travel and accommodation series.

Insurance

Insurance coverage is held by most North Queenslanders and most home and contents insurance policies cover cyclone damage. As such it is expected claims for damages from Tropical Cyclone Debbie will increase, resulting in increased costs for insurance providers. This may lead to increases in insurance premiums in future periods.

Insurance accounts for 1.6 per cent of household expenditure in the CPI. Any impact on insurance premiums due to natural disasters largely depends on the amount and size of the claim payments. Typically insurance companies raise the price of premiums across all policy holders rather than just in specific regions to recover claim payments. Therefore, while insurance premiums in North Queensland are out of scope of the CPI, insurance pricing practises means price change for insurance premiums of households within scope of the CPI (i.e. within Australia's capital cities) will be recorded in the CPI. Figure 2 shows that the impact from natural disasters flows through over a number of years to insurance premiums.

Following Cyclone Yasi, Brisbane recorded rises in insurance premiums of 21 per cent during the period mid-2011 and mid-2013, compared to rises of 18 per cent and 10 per cent in Sydney and Melbourne respectively. Many insurance companies had increased their premiums in response to the greater risks involved and to recoup their substantial losses from higher reinsurance costs and processing insurance claims. The impact of Tropical Cyclone Debbie on insurance policies is expected to flow through to the CPI, particularly in Brisbane, over a number of quarters.

FIGURE 2: COMPARISON OF INSURANCE PREMIUMS ACROSS SYDNEY, MELBOURNE AND BRISBANE
FIGURE 2: COMPARISON OF INSURANCE PREMIUMS ACROSS SYDNEY, MELBOURNE AND BRISBANE



USE OF TRANSACTIONS DATA IN THE CPI

Since 2014 the ABS has made use of transactions data to compile the Australian CPI, which now represents approximately 25 per cent of the weight of the CPI .Transactions data is high in volume and contains detailed information about individual transactions or summaries, date, quantities, product descriptions and value of products sold. In addition to the prices, transaction data provide information about quantities which enables a better understanding of the level of consumption for each product. These data provide up to date information on the substitutions made by consumers in response to price changes.

Transactions data will enable the ABS to assess the impact of Tropical Cyclone Debbie on fruit and vegetables prices paid, and quantities consumed, by consumers. This will allow the ABS to accurately determine the level of substitution that has occurred for fruit and vegetables and the contribution of each type of fruit and vegetable to the CPI in each quarter.


CONCLUSION

This analysis suggests Tropical Cyclone Debbie will impact some components of the CPI, however the magnitude of the impact is expected to be small. The impact on the headline CPI is also expected to be negligible.


REFERENCES

Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). (2017). Australian vegetable-growing farms.
Department of Agriculture and Water Resources. (n.d.). Sugar.
Queensland Cane Growers Organisation Ltd. (2017, March). Cyclone Debbie chews up $150 million of Queensland’s cane crop.
Queensland Department of Agriculture and Fisheries. (2012). Sugar.
Queensland Farmers Federation. (2017). Farmers begin Cyclone Debbie recovery.
Special Broadcasting Service (SBS). (2011, February). Cyclone Yasi to cost Aussie agriculture $800m.
The Australian. (2011, February). Sugar industry takes $500m hit from Cyclone Yasi.