6470.0.55.001 - Information Paper: Introduction of the 17th Series Australian Consumer Price Index, 2017  
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ENHANCEMENTS IMPLEMENTED IN THE 17TH SERIES CPI AND SLCIS

SUMMARY

2.1 The 17th series CPI and SLCIs include a number of enhancements which will be incorporated from the December quarter 2017. These enhancements will improve the quality of the indexes and better position the ABS for the annual re–weighting of the CPI using National Accounts Household Final Consumption Expenditure (HFCE) data from December quarter 2018. The 17th series CPI will be linked to previous CPI series, providing a continuous measure of price change since 1948. The All groups CPI (headline measure) will not be revised.
The enhancements are:

    • updated CPI and SLCI expenditure class (EC) weights derived from the 2015-16 Household Expenditure Survey (HES) and other data sources;
    • updated geographical coverage to the Australian Statistical Geography Standard (ASGS) 2011;
    • changes to data sources and methodologies in deriving weights for the following ECs in the CPI: New dwelling purchase by owner–occupiers, Insurance, and Other financial services;
    • updated expenditure estimates used to derive the weights for the Self–funded retirees sub–group in the SLCIs; and
    • changes to the method used to estimate the upper level substitution bias in the Australian CPI.

2.2 A summary of the main changes is provided below. More detailed information can be found in later chapters of this information paper.

2.3 From 2018, the CPI will be re–weighted annually in December quarters. Further information on the forthcoming annual re–weighting can be found in Chapter 6: Upcoming work.

2.4 Additionally, as noted in Information Paper: An Implementation Plan to Annually Re–weight the Australian CPI (cat. no. 6401.0.60.005), the ABS has documented a method to calculate EC contributions to percentage change with annually re–weighted indexes. Empirical analysis of this approach can be found in Appendix 3.

2.5 The 16th series CPI review resulted in a number of outcomes which required further investigation. These are detailed in Outcome of the 16th Series Australian Consumer Price Index Review (cat. no. 6469.0). Appendix 4 provides an update on these outcomes.


UPDATED GEOGRAPHICAL COVERAGE TO THE AUSTRALIAN STATISTICAL GEOGRAPHY STANDARD (ASGS) 2011

2.6 The geographical coverage of the CPI and SLCIs is predominantly based on the capital city average household expenditure data obtained from the HES. The 16th series was derived from the 2009-10 HES capital city Statistical Divisions, which were collected based on the Australian Standard Geographical Classification (ASGC).

2.7 In line with the 2015-16 HES, the geographical coverage of the CPI and SLCIs has been updated to the Australian Statistical Geography Standard (ASGS) 2011 for the 17th series, with the capital cities defined by Greater Capital City Statistical Areas (GCCSAs). For more information, refer to Australian Statistical Geography Standard (ASGS): Volume 1 – Main Structure and Greater Capital City Statistical Areas, July 2011 (cat. no. 1270.0.55.001).

2.8 The change from Statistical Divisions to GCCSAs has resulted in an expansion of the capital city boundaries for Melbourne, Brisbane, Adelaide and Perth. This is also the case for Canberra, however the actual difference in population is minimal. The definitions of Sydney and Darwin have remained largely unchanged. The impact of these boundary changes on price collection is being addressed through the CPI’s regular sample maintenance and review program.


CHANGES TO DATA SOURCES AND METHODOLOGIES IN DERIVING THE CPI WEIGHTS


New dwelling purchase by owner–occupiers

2.9 In the CPI, New dwelling purchase by owner–occupiers refers to the expenditure on net additions of household sector dwellings as a measure of owner–occupier housing costs, and includes new homes (excluding land) and major improvements. Specifically, expenditure on New dwelling purchase by owner–occupiers comprises of four components: owner–occupied housing, first home owners' grants, alterations and additions, and installed appliances.

2.10 Previously, estimates of net additions to the owner–occupier dwelling stock were derived from Census data on the number of owner–occupier households, moved forward by household projections from Household and Family Projections, Australia (cat. no. 3236.0). For the 17th series, National Accounts estimates of the stock of owner–occupied dwellings have been used. These estimates are benchmarked to the Census.

2.11 The data sources for expenditure on the alterations and additions and installed appliances components have also changed in the 17th series. These estimates were previously obtained from the HES. For the 17th series, National Accounts estimates have been used in deriving the weights. The data source for alterations and additions is the National Accounts alterations and additions component of Private gross fixed capital formation (GFCF), while expenditure on installed appliances is sourced from HFCE data.


Insurance

2.12 The weights for Insurance in the CPI should reflect the service provided by insurers to the household sector in aggregate. This is represented by the difference between the premiums paid and the claims received, otherwise known as the insurance service charge (ISC). This differs from the expenditure reported in the HES, which are the gross premiums paid by households.

2.13 In previous series reviews, adjustments were made to the HES data for CPI weighting purposes, using data obtained from the Australian Prudential Regulation Authority (APRA) and insurance companies.

2.14 For the 17th series, the weight for Insurance in the CPI has been derived using National Accounts estimates of the insurance service charge, which align conceptually with the CPI. This will also be the data source used when the CPI is annually re–weighted.


Other financial services

2.15 Other financial services include real estate agent services, legal and conveyancing services, stockbroking services and taxes on property transfers (i.e. stamp duty).

2.16
In past series reviews, expenditure on real estate agent services was derived from property transaction data and unpublished ABS survey data on real estate agents’ fees. From the 17th series, the real estate fees component of the National Accounts Private GFCF ownership transfer costs series has been used.

2.17 The data sources for the remaining components of Other financial services have remained unchanged from the 16th series.


EXPENDITURE ESTIMATES USED TO DERIVE THE WEIGHTS FOR THE SELF–FUNDED RETIREES SUB–GROUP IN THE SLCIS

2.18 The SLCIs are produced as a by-product of the CPI, with weights also derived from the HES. As a result, use of HES expenditures at the capital city level is preferred for the SLCIs, as it aligns the weighting and price collection scope of the two sets of indexes.

2.19 For the 16th series, the expenditure weights for the SLCIs were calculated using 2009-10 HES weighted average of eight capital cities expenditures for all population sub–groups except Self–funded retirees. The weights for Self–funded retiree households were derived using national expenditures, due to high relative standard errors (RSEs) in the capital city estimates.

2.20 For the 17th series, the weighted average of eight capital cities expenditure estimates have been used for all population sub–groups. An analysis of the 2015-16 HES results has shown that expenditure weights at the capital city level are sufficiently reliable for all household types.


ESTIMATING THE UPPER LEVEL SUBSTITUTION BIAS IN THE AUSTRALIAN CPI

2.21 In order to provide an estimate of the potential item (upper level) substitution bias in the fixed–weight Australian CPI, the ABS constructs a retrospective superlative index during series reviews. This analysis can only currently be conducted retrospectively when the HES data is available.

2.22
Superlative indexes allow for product substitution as they make use of weights for both the earlier and later periods under consideration, whereas the Laspeyres index uses only base period weights.

2.23 Under the previous approach of estimating substitution bias, a quarterly superlative index was derived using the published, price updated weights. For the 17th series, the ABS has improved the estimation of the superlative index to better reflect true inflation. This index is now derived on a financial year basis, using the original weights from the HES and financial year estimates of price change. This new approach is preferred as it ensures consistency with the original period of the weights.

2.24 Updated estimates of substitution bias for the 1998-99 to 2015-16 period are available from Chapter 5: Estimating the upper level substitution bias in the Australian CPI.