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The overall (or All groups) CPI provides a measure of the average rate of price change. In calculating an average measure of this type it is necessary to recognise that some items are more important than others. Price changes for the more important items should have a greater influence on the average than price changes for less important items. For example, if household expenditure on bread is three times as large as expenditure on cheese, then a 10% price increase for bread should have a similar impact on the CPI as a 30% price increase for cheese.

CPI weights

Measures of expenditure on each of the 101 CPI expenditure classes are obtained primarily from the HES. However, some adjustments are made to HES data to account for known instances of underreporting (the most notable being for alcohol and tobacco) and any other anomalies. The adjusted HES data is then used to derive a ‘weight’ for each expenditure class. The weights for the 13th series CPI expenditure classes as at June quarter 1998 prices are shown in Appendix 1.

The weights reflect the relative expenditures of the CPI population group as a whole and not those of any particular type and size of household. As such, the weights are said to reflect expenditures of households on average and not the expenditure of an average household.

The description of the CPI as measuring the change in price of a fixed basket of goods and services requires some qualification.

Basket is fixed in terms of underlying quantities at the expenditure class

First, although the weights are expressed in terms of expenditure shares, it is not the expenditure shares that are held constant (or fixed) from period to period. What is held constant are the quantities of goods and services underpinning these expenditures (where expenditure is given by the product of quantity and price). Presentation of weights in expenditure terms reflects the fact that it is simply not possible to present quantity weights in a meaningful way. The relative expenditure shares of items will change over time in response to changes in relative prices.

Weights below the expenditure class can be varied

Second, while the implicit quantity weights are held constant at the expenditure class level, the weights of items within an expenditure class (e.g. different grades of bread) can be varied between periodic reviews to reflect changed purchasing patterns. Any weight changes are introduced into the CPI in such a way as they do not, of themselves, affect the level of the index.

Review of fixed weights

The underlying quantity weights for CPI expenditure classes are reviewed at approximately five-yearly intervals with timing generally linked to the availability of HES data. The introduction of new weights resulting from these periodic reviews is signaled by the commencement of a new CPI series (e.g. the 13th series CPI was introduced in September quarter 1998). These weights remain fixed for the life of the series.