6470.0.55.001 - Information Paper: Introduction of the 17th Series Australian Consumer Price Index, 2017  
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DESCRIPTION OF THE 17TH SERIES WEIGHTING PATTERN: SOURCES AND METHODS


3.1 A comprehensive description of the CPI methodology is outlined in Consumer Price Index: Concepts, Sources and Methods (cat. no. 6461.0). This will be updated to reflect the changes in the 17th series CPI and is scheduled for release in February 2018.

3.2
The 17th series CPI, consistent with the 13th, 14th, 15th and 16th series, has been designed as a general measure of price inflation for the household sector. The CPI measures changes in the price of a fixed quantity of goods and services acquired by consumers in metropolitan private households.

3.3 The SLCIs measure the impact of changes in prices on the out–of–pocket expenses incurred by households to gain access to a fixed quantity of consumer goods and services. They have been compiled and published since June 2000 and are prepared for four types of Australian households:

    • Employee households (i.e. those households whose principal source of income is from wages and salaries);
    • Age pensioner households (i.e. those households whose principal source of income is the age pension or veterans affairs pension);
    • Other government transfer recipient households (i.e. those households whose principal source of income is a government pension or benefit other than the age pension or veterans affairs pension); and
    • Self–funded retiree households (i.e. those households whose principal source of income is superannuation or property income and where the HES defined reference person is 'retired' (not in the labour force and over 55 years of age)).

3.4 The PBLCI was added to the suite of living cost indexes in the June quarter 2009 and combines the Age pensioner and Other government transfer recipient households. Unlike the CPI, the SLCIs are compiled on an outlays basis.

3.5 There are three areas of expenditure in which the CPI and the SLCIs differ. These are:
    • Purchase of dwellings
        • Under the acquisitions approach used in the CPI, the net purchase of housing, the increase in volume of housing due to renovations and extensions, plus other costs (e.g. maintenance costs and council rates) are all included for owner–occupied households. Of note, land is excluded from the calculation of housing in the Australian CPI as it is considered an investment rather than consumption. This approach aligns with international statistical standards and the primary purpose of the CPI as a macro–economic indicator. Changes in rental are measured for that part of the population that resides in rented dwellings. The CPI excludes interest paid on mortgages.
        • Under the outlays approach used in the SLCIs, the changes in the amount of interest paid on mortgages (measured as part of Insurance and financial services) and other costs (e.g. maintenance costs and council rates) are included for owner–occupied housing. In addition, changes in rental are measured for that part of the reference population that resides in rented dwellings.
    • Insurance (other than health insurance)
        • Under the acquisitions approach, the weight for insurance in the CPI relates to the net value of the service provided by the insurance company to the household sector as a whole. In simple terms, this is the amount of premiums paid by households, less the amounts reimbursed by way of claims.
        • Under the outlays approach used for the SLCIs, the weight relates to the gross value of insurance premiums paid by households.
    • Financial services
        • The CPI includes services relating to the acquisition, holding and disposal of financial and real assets. This includes deposit and loan facilities provided by financial institutions and costs associated with the acquisition and disposal of real estate, such as stamp duty and real estate commission fees.
        • The SLCIs include mortgage interest and consumer credit charges, but exclude all other financial services (i.e. deposit and loan facilities (direct charges), and other financial services).

3.6 In determining the composition of the CPI and SLCI baskets (and item weights), the objective is to reflect the contemporary experiences of households. The starting point for compiling the weights is the results of the ABS 2015-16 HES. The HES obtained information on the spending habits of Australian households throughout the 2015-16 financial year.


2015-16 HES DATA

3.7 The 2015-16 HES collected information from a sample of 10,046 households over the period July 2015 to June 2016. Data was collected using a diary of personal expenditures in which usual residents aged 15 years and over record their expenditure over a two week period. A household level computer assisted interview questionnaire also collected information on household characteristics, expenditures common to all household members (e.g. utility bills) and irregular or infrequent expenditures. The recall period for the irregular or infrequent expenditures varied: 3 months including furniture and house repairs; last payment including general rates, electricity and health services; and the last 12 months including motor vehicle purchase, motor vehicle repair and maintenance, education, overseas holiday travel and house alterations and additions. See Household Expenditure Survey, Australia: Summary of Results, 2015-16 (cat. no. 6530.0) for more information on the HES.

3.8 The 2015-16 HES was collected under the Australian Statistical Geography Standard (ASGS) introduced in 2011. This is a change from the Australian Standard Geographical Classification (ASGC) used for the 2009-10 HES. The ASGS provides a common framework of statistical geography used by the ABS to enable the publication of statistics that are comparable.

3.9 The detailed HES expenditure items are classified according to the ABS Household Expenditure Classification (HEC). A correspondence exists between the CPI and HEC. Most HEC codes have a direct correspondence to one CPI expenditure class. Where a one–to–one correspondence could not be established due to the broad nature of a HEC code or insufficient information being provided by households, splits were determined either on a prorate basis, using industry data or subjectively across appropriate expenditure classes. In most cases where splits were required, the expenditures involved were relatively small. The CPI to HEC correspondence will be published as a data cube in Consumer Price Index: Correspondence with 2015-16 Household Expenditure Classification, Australia (cat. no. 6446.0.55.001) with the implementation of the 17th series CPI on 31 January 2018.

3.10 The CPI to HEC correspondence was applied to the HES data to derive household average weekly expenditure for 2015-16 at the expenditure class level. The average weekly expenditure was used to analyse both the 2015-16 expenditure and the changes since the 2009-10 HES.

3.11 Although the HES provides a comprehensive coverage of household expenditure, various adjustments are made to the HES average weekly expenditures for use in the CPI and SLCIs. In most cases the adjustments to expenditure were made without compensating adjustments to other expenditure in the CPI and SLCI baskets. The implication is that changes in such expenditure were assumed to have come from, or gone into savings.

3.12 For the 17th series, National Accounts data has been used to derive expenditure for some of the CPI ECs, representing a change from the data sources used previously. These changes result in consistency with the data sources to be used under annual re–weighting of the CPI from December quarter 2018, and were brought forward to better position the CPI for this shift. These changes have been earlier communicated by the ABS in Information Paper: Increasing the Frequency of CPI Expenditure Class Weight Updates (cat. no. 6401.0.60.002).


ADJUSTMENTS TO HES DATA


Under–reporting of alcohol and tobacco expenditures in the HES

3.13 Historically, HES expenditure on alcohol and tobacco is under–reported when compared to information from other sources. As a result, HES estimates are adjusted for under–reporting based on factors derived at the national level using National Accounts HFCE data. These factors are applied to the HES expenditure estimates for each capital city. The 2015-16 HES estimated expenditure for alcohol at a little under half, and tobacco at a little over one third of the respective National Accounts estimates.

3.14 As households do not always separately identify alcohol and meal expenditures when reporting expenditure on restaurant meals in the HES, a small adjustment is made using the proportion of reported meal expenditure that is alcohol, estimated from an analysis of HES unit records. Meal expenditure is reduced by the proportion of reported meal expenditure that is alcohol, with the difference then included in expenditure on alcohol. This adjustment does not impact overall household expenditure.


Audio, visual and computing equipment

3.15 The 2015-16 HES data provided the latest information on household expenditure on Audio, visual and computing equipment which was then price updated to the September quarter 2017. However, for Audio, visual and computing equipment this approach may lead to underestimation of the weight in the CPI and SLCIs due to the relatively high volume growth in the quality (size and features) of these high technology goods compared to other products. Therefore, a volume increase of around 12% has been calculated from the National Accounts HFCE components between 2015-16 and September quarter 2017.


Recall adjustment

3.16 As noted in paragraph 3.7, some expenditures are collected in the HES as recalled items rather than diary entries. To the extent that prices for these items change between the time the household purchased them and their inclusion in the HES, expenditures will not accurately reflect the underlying quantities acquired during the HES reference year.

3.17 To address this, adjustments are made for items where the recall period is the last twelve months, such as education and overseas holiday travel. No adjustments are made for items where the recall period is the last three months, since these adjustments would be small. Additionally, no adjustment is made for items where the recall period is the last payment, as these typically have a short billing cycle (often quarterly), or options to pay periodically (e.g. local government rates).

3.18 For information on how recall adjustments are calculated, refer to paragraphs 6.18 and 6.19 of Consumer Price Index: Concepts, Sources and Methods, 2016 (cat. no. 6461.0).


Salary sacrifice

3.19 Salary sacrifice is an arrangement between an employee and employer whereby part of the employee's pre–tax cash salary is traded for non–cash benefits. Conceptually, these arrangements should be captured in both gross wages and salaries, and household expenditure.

3.20 The items that have been adjusted for salary sacrifice include motor vehicles. To ensure the expenditure on motor vehicles includes all motor vehicles purchases (i.e. including via salary sacrifice), adjustments are made to the relevant HES items. For that reason, salary sacrifice amounts reported against motor vehicles are allocated to motor vehicle purchases, registration, insurance, motor vehicle repair and servicing, and automotive fuel.


Outlier and aberrant adjustments

3.21 The HES data was compared across capital cities and over time to validate the 17th series expenditures at the expenditure class level. The HES expenditure in 2009-10 was revalued to 2015-16 dollars to derive the volume changes between the two HES reference years and compared to the 2015-16 HES.

3.22
A number of unit record adjustments were made, in particular to the smaller capital cities where HES sample sizes are smaller and, in general, the standard errors are larger. The outlier adjustment method used was winsorisation, which involves replacing an unrepresentative expenditure by the next largest estimate. Where unit record outliers could not be identified, differences were further investigated. A small number of volume changes could not be validated, resulting in adjustments using either alternative volume data or based on market intelligence.

EXPENDITURE NOT SOURCED FROM HES


New dwelling purchase by owner–occupiers

3.23 New dwelling purchase by owner–occupiers in the CPI includes the net additions of household sector dwellings as a measure of owner–occupier housing costs. This includes new homes (excluding land) and major improvements. Sales of houses that take place between households (generally established dwellings) are excluded so that the weights relate only to net additions to the housing stock arising from household purchases from other sectors (i.e. from businesses such as builders and developers). 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.

3.24 To derive the owner–occupied housing component, expenditure is estimated by multiplying the average value of private dwelling completions for the reference period by the change in the owner-occupied housing stock.

3.25 The average value of private dwelling completions for 2015-16 is obtained from Building Activity, Australia (cat. no. 8752.0).

3.26 The change in the owner–occupied dwelling stock is sourced from National Accounts HFCE estimates. This differs to the 16th series where the change was derived using 2006 Census of Population and Housing capital city counts of owner–occupied households, moved forward using household projections from Household and Family Projections, Australia (cat. no. 3236.0).

3.27 Consistent with standard practice relating to the inclusion of subsidies in the CPI, subsidies paid to first home buyers are treated as negative expenditure and subtracted from the new dwelling purchase by owner–occupiers house acquisition expenditure.

3.28 Expenditure on alterations and additions is derived from the alterations and additions component of Private GFCF from the National Accounts. Expenditure on installed appliances is sourced from HFCE data. Both items are added to the estimate for house acquisition to provide the total expenditure on New dwelling purchase by owner–occupiers. This differs from the 16th series, where both items were derived from the HES.


Motor vehicles

3.29 The weight for Motor vehicles in the CPI and SLCIs is derived from National Accounts HFCE data. This weight reflects purchases of new cars, transfer of used cars to the household sector (from business or government) and the service fee from the transfer of second hand cars.


Tertiary education

3.30 Expenditure on higher education in the HES includes Higher Education Loan Program (HELP) payments made by households upfront, plus any HELP repayments made through the taxation system during the reference period. This measure aligns with the outlays approach used for the SLCIs, however is not consistent with the concept of an acquisitions–based CPI, where expenditures should reflect the cost to households of the education service acquired during the reference period. The CPI scope includes the actual payments made during the period (upfront payments), plus fees for education services acquired during the period, but deferred to be paid at a later date.

3.31 To align the household expenditure on tertiary education fees in the CPI, HELP expenditures are calculated using data from the Department of Education and Training on total upfront and deferred fees, and the number of students paying HELP loans.


Insurance

3.32 The Insurance EC covers comprehensive insurance for dwellings (including contents), motor vehicles and compulsory third party (CTP) insurance. For the purpose of measuring household price inflation, the weight for insurance in the CPI should reflect the cost of the service provided by insurers (gross premiums less claims), rather than the value of gross premiums paid. The latter is reported in the HES.

3.33 Expenditure on contents, motor vehicle and CTP insurance are derived from National Accounts HFCE data. The insurance for dwellings component is excluded from HFCE as it is considered intermediate consumption in the National Accounts. Expenditure on insurance for dwellings is instead sourced from National Accounts estimates of intermediate consumption of the Ownership of dwellings industry. These National Accounts estimates align with the conceptual basis of Insurance in the CPI.

3.34 This differs from the 16th series where HES gross premiums were adjusted onto a net basis using information collected by the Australian Prudential Regulation Authority (APRA) and from insurance companies.

3.35 Expenditures funded by claims are added back to the appropriate items. The data source has been changed to be consistent with National Accounts data. This differs to the 16th series, where claims–to–premiums ratios were calculated using APRA and insurance company data, and then applied to the HES gross premiums.

3.36 It should be noted that HES estimates of insurance are used in deriving the expenditure weights in the SLCIs. As the SLCIs are measured on an outlays basis, the weight of Insurance reflects the gross value of premiums paid by households.


Financial services

3.37 Expenditure on financial services in the CPI cannot be sourced from the HES as it is either not directly observable or the HES did not capture the transactions in sufficient volumes or detail. The Financial services sub–group includes two expenditure classes: Deposit and loan facilities (direct charges) and Other financial services.


Deposit and loan facilities (direct charges)

3.38 Expenditure on Deposit and loan facilities (direct charges) is determined through the use of administrative data sets (obtained from financial institutions and government reporting agencies) of financial institution fees and charges for Australian households.


Other financial services

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

3.40 The real estate fees component of the National Accounts Private GFCF ownership transfer costs series is used to derive expenditure on real estate agent services. This represents a change from the 16th series, where expenditure was derived from property transaction data over the 2009-10 period and unpublished ABS survey data on real estate agents’ fees.

3.41 Expenditure on legal and conveyancing services is also derived from the Private GFCF ownership transfer costs series from National Accounts.

3.42 National Accounts HFCE data is used to derive an estimate of household expenditure on stockbroking services.

3.43 Expenditure on taxes on property transfers is compiled using data supplied by the State and Territory Revenue Offices.


REVALUING EXPENDITURE TO THE LINK PERIOD

3.44 The expenditure weights derived from the HES are based on expenditures (i.e. price x quantity) in 2015-16 (the weight reference period). These new expenditure patterns will not be introduced into the CPI and SLCIs until the December quarter 2017 (with September quarter 2017 as the link period). Prior to implementation, in line with current CPI and international practice, the expenditures have been revalued to the September quarter 2017 to preserve the underlying quantities, but take into account the price changes that have occurred between the weight reference and link periods.

3.45 The calculation of the revalued estimates involves taking the 2015-16 expenditures and multiplying them by revaluation factors. These factors are derived as the ratio of the component’s September quarter 2017 price index to the average of its quarterly price indexes for 2015-16.