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5.1. Section 4 developed the DFP price index model within the broader market transactions analytical framework. The DFP model is comprised of an aggregate, economy-wide DFP index along with its component indexes. The largest component index relates to HCP, estimated to account for 55–60% of the weight of the total DFP index (see Appendix 1). This component is illustrated in bold on diagram 5 in the previous section.
5.4. The development of indexes for the components other than HCP would be within a longer-term time frame. Nevertheless, for completeness, Appendix 1 contains indicative weighting estimates and contains the results of initial investigations into identifying possible data sources.
Relationship to the Consumer Price Index
5.5. Although widely used for other purposes, such as a measure of inflation, the CPI is designed primarily as a means of assessing changes in the purchasing power of wage and salary earner household incomes and, as such, has played an important role in the income adjustment process.
5.10. The scope would be extended beyond the CPI target population by changing the weighting pattern so that it related to purchases by all Australian households, rather than just metropolitan wage and salary earner households (excluding the top decile). Weights corresponding to purchases by all householders would be obtained from the national accounts, with modifications to ensure consistency with the concepts of the DFP model. An index for HCP would then be calculated using appropriate disaggregated CPI price data.
5.11. Note that the HCP price index would differ from the national accounts measure, private final consumption expenditure, through the exclusion of notional transactions such as the imputed dwelling rent of owner occupiers, non-marketed goods and services provided to households and purchases by NPISH.
5.12. Below is a discussion on practical issues associated with the identification of market determined prices.
Market determined prices
5.13. As inflation is a phenomenon of markets, coverage of a HCP index should be confined to actual markets, where goods and services are exchanged at prices determined by the interaction of buyers and sellers. In comparison with private final consumption expenditure under the national accounting framework, this would require the exclusion of those transactions where, by convention, the SNA deems homeowners to rent dwellings from themselves as landlords.
5.16. There are four general categories of goods and services which may not have market determined prices:
5.17. The implications of differentiating between market and non-market goods and services are significant. Those non-market goods and services which are provided to households by government and NPISH would not be included in the HCP index. As the purchase of inputs to the production of non-market goods and services represents the final point at which these products are traded at market determined prices, the providers of non-market goods and services are regarded as the final purchasers, and their purchases would be within the scope of NPISH and General Government Consumption Purchases indexes. This represents a significantly different treatment between the HCP index and the CPI, which includes the actual costs incurred by households for all goods and services.
5.18. There are many goods and services where subsidies have played a role but the transaction price can still be viewed as being market determined. The prices at which these goods and services are purchased by households would therefore be reflected in the HCP index.
5.19. To illustrate some of the issues and complexities involved, consider the case of education services. Prices paid for education services provided by the public education system may not be market determined due to high levels of government subsidies. The cost of inputs into the public education system would therefore be used in the DFP measure and would be categorised as Government Consumption Purchases. Many non-government schools are NPISH, so if the prices of their services were assessed as being non-market determined, the prices of their inputs would feed into NPISH Consumption Purchases index. Other non-government schools, although in receipt of some government funding, may charge prices for their services which are market determined. These final transactions would then be included in the HCP index.
5.20. Areas which would need to be examined closely before decisions can be made include public transport fares, medical services, pharmaceuticals, rents for government-owned dwellings, local government services, tertiary and private education, and government provided child care. In some cases, these items may need to be studied at a commodity, regional and/or enterprise level, as there could be significant variation in the rate of subsidies paid when items are disaggregated.