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 6461.0 - Consumer Price Index: Concepts, Sources and Methods, 2011   Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 19/12/2011
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CHAPTER 13 OUTPUTS AND DISSEMINATION

INTRODUCTION

13.1 This chapter describes the information published by the Consumer Price Index (CPI) area of the ABS. It also explains how to interpret index numbers. For example, it explains the differences between index points and percentage changes, how to determine the major movers in the CPI, and how to construct index series from components of the CPI.

INFORMATION PAPERS

13.2 The CPI is reviewed and re-weighted every six years. The last major review of the CPI resulted in the 16th series of the index which was introduced in the September quarter 2011. The 16th series CPI review was a major review and considered issues such as the principal purpose of the CPI, compilation frequency and an evaluation of the deposit and loans facilities index. Some of the major decisions that emerged from the 16th series review were:

• The principal purpose of the CPI is household inflation measurement and the acquisitions approach was confirmed as the conceptual basis for compiling the CPI. Consistent with maintaining this conceptual basis, the price of owner-occupied housing (OOH) is to continue to be measured as the change in the price of gross fixed capital formation (GFCF) of houses, net of land. A weighting pattern representative of all private households in the eight capital cities was used.
• The ABS changed its measurement of financial services in the CPI to ensure that this component of the CPI is of high quality. The deposit and loan facilities (indirect charges) component has been removed from the headline CPI from the September quarter 2011 until such time that methods and data sources are sufficiently robust for reintroduction to the CPI. The deposit and loan facilities index comprises direct fees and charges only and was renamed 'Deposit and loan facilities (direct charges)’. A new analytical series, comprising the ‘All groups CPI including deposit and loan facilities (indirect charges)’ was introduced.
• New household expenditure weights were derived from the 2009-10 Household Expenditure Survey (HES) and other data sources.
• The ABS published a range of additional analytical measures of inflation from the September quarter 2011 including ‘All groups CPI excluding food and energy’ and ‘All groups CPI, seasonally adjusted’.

13.3 As part of this major review the ABS published three information papers:
13.4 These papers describe the review process, the issues considered, the review outcomes, the re-weighting process, and outline the changes from the previous series.

13.5 The 15th series CPI, introduced in the September quarter 2005, was a minor review. The item weights were revised in line with expenditure patterns identified in the 2003-04 HES, and a new sub-group called Financial services was introduced into the index. Once again, the ABS published an Information Paper describing the changes:
13.6 The 14th series of the CPI was introduced in the September quarter 2000, after a minor review completed early in 2000. The changes introduced in the 14th series were considered necessary to address issues arising from the introduction of The New Tax System (TNTS) on 1 July 2000. As part of the review process the ABS published Information Papers describing the changes:
13.7 Prior to the 16th series review, the previous major review of the CPI was the 13th series review conducted during 1997 and 1998 and introduced in respect of the September quarter 1998. A major outcome of that review was the decision that the CPI would change from a measure of the change in living costs of employee households to a general measure of price inflation for the household sector. Consequently the population coverage was expanded from wage and salary earner households to include all metropolitan households.

13.8 As part of this major review, the ABS published three Information Papers:

PUBLISHED STATISTICS

13.9 The CPI is compiled quarterly by the ABS for quarters ending on 31 March, 30 June, 30 September, and 31 December each year. The data are typically released on the fourth Wednesday after the end of the reference quarter, depending on public holidays, but no later than the last Wednesday of the month after the end of the reference quarter, in the publication Consumer Price Index, Australia (cat. no. 6401.0).

13.10 The statistics are published in several different ways. The main mechanism for dissemination of ABS data is through the ABS website www.abs.gov.au. The website provides free of charge:
• the main findings from the statistical releases;
• a version of the publications in PDF format which may be downloaded;
• a range of time series spreadsheets containing all available indexes in Microsoft Excel format; and
• a range of analytical measures of inflation including All groups CPI, seasonally adjusted and All groups CPI excluding food and energy.

Quarterly and annual data

13.11 The CPI is published for both quarters and financial years. The index number for a financial year is the simple arithmetic average (mean) of the index numbers for the four quarters of that year. Index numbers for calendar years are not published by the ABS, but can be calculated as the simple arithmetic average of the quarterly index numbers for the year concerned.

Release of CPI data

13.12 To ensure impartiality and integrity of ABS statistics, it is standard ABS policy and practice to make all our statistical releases available on our website to all government, commercial and public users of our statistics, simultaneously from 11.30 am (Canberra time) on the day of their release. Prior to 11.30 am, all ABS statistics are treated as confidential and regarded as 'under embargo'.

13.13 However, given the high level of market and community interest in the CPI, it is important from a 'public good' perspective that key ministers are able to respond in an informed manner to requests from the media for early comment on the released statistics, thereby avoiding any inadvertent misinterpretation. For this purpose, a secure 'lockup' facility is provided to enable authorised government officials and ministerial staff time to analyse the release and develop a briefing to be provided to relevant ministers after lifting of the embargo.

13.14 Authorised persons attending a lockup are required to remain in a secure room managed by ABS staff, and are prohibited from communicating any information from the statistical release to anyone outside the room, until the embargo is lifted at 11.30 am (Canberra time). Attendees at the lockup are also required to sign security undertakings which include provision for prosecution under the Crimes Act 1914 for anyone who breaches the conditions for attending the lockup. A list of products approved for provision to authorised persons via ABS-hosted lockups on the morning of the day of their release is available on the ABS website on the 'Policy on Pre-Embargo Access to ABS Statistical Releases' in the 'About Us' section.

Revisions

13.15 The ABS strives for accuracy in all of its publications. The accuracy of the CPI is of particular importance to the ABS, and in recognition of the use of the CPI in determining economic policy and in contract price indexation, the ABS makes an effort to eliminate the need for revision. However, if revision is required, the ABS's revisions policy is based on the Resolution on Consumer Price Indices issued by the International Labour Organization in 2003:

"When it is found that published index estimates have been seriously distorted because of errors or mistakes made in their compilation, corrections should be made and published. Such corrections should be made as soon as possible after detection according to publicly available policy for correction. Where the CPI is widely used for adjustment purposes for wages and contracts, retrospective revisions should be avoided to the extent possible."

INTERPRETING INDEX NUMBERS

Index points and percentage changes

13.16 Movements in indexes from one period to any other period can be expressed either as changes in index points or as percentage changes. The following example illustrates these calculations for the All groups CPI (weighted average of the eight capital cities) between September quarter 2011 and the September quarter 2010. The same procedure is applicable for any two periods.
Index number for the All Groups CPI in September quarter 2011 = 179.4
less index number for September quarter 2010 = 173.3
Change in index points = 6.1
Percentage change 6.1/173.3 x 100 =3.5%

13.17 For most applications, movements in price indexes are best calculated and presented as percentage changes. Percentage change allows comparisons in movements that are independent of the level of the index. For example, a change of 2.0 index points when the index number is 120.0 is equivalent to a change of 1.7%. But if the index number were 80.0, a change of 2.0 index points would be equivalent to a change of 2.5%, a significantly different rate of price change. Only when evaluating change from the index reference period of the index will the points change be numerically identical to the percentage change.

13.18 The percentage change between any two periods must be calculated, as in the example above, by direct reference to the index numbers for the two periods. Adding the individual quarterly percentage changes will not result in the correct measure of longer term percentage change. That is, the percentage change between (say) the June quarter of one year and the June quarter of the following year will not necessarily equal the sum of the four quarterly percentage changes. The error becomes more noticeable the longer the period covered, and the greater the rate of change in the index. This can readily be verified by starting with an index of 100.0 and increasing it by 10% (multiplying by 1.1) each period. After four periods, the index will equal 146.4 delivering an annual percentage change of 46.4%, not the 40.0% obtained by adding the four quarterly changes of 10.0%.

13.19 Although the CPI is compiled and published as a series of quarterly index numbers, its use is not restricted to the measurement of price change between quarters. A quarterly index number can be interpreted as representing the average price during the quarter (relative to the index reference period), and index numbers for periods spanning more than one quarter can be calculated as the simple (arithmetic) average of the quarterly indexes. For example, an index number for the calendar year 2011 is the arithmetic average of the index numbers for the March, June, September and December quarters of 2011.

13.20 This characteristic of index numbers is particularly useful. It allows average prices in one year to be compared with those in any other year. It also enables prices in (say) the current quarter to be compared with the average prices prevailing in a previous year.

13.21 The quarterly change in the All groups CPI represents the weighted average price change of all the items included in the CPI. Publication of index numbers and percentage changes for components of the CPI are useful in their own right. However, these data are often not sufficient to enable important contributors to total price change to be reliably identified. What is required is some measure that encapsulates both an item’s price change and its relative importance in the index.

13.22 If the All groups CPI index number is thought of as being derived as the weighted average of the indexes for all its components, then in concept the index number for a component multiplied by its weight to the All groups CPI index results in what is called its points contribution. This relationship only applies if all the components have the same reference base, and there has been no linking of component series since the index reference period. However, the Australian CPI has been linked several times since its index reference period (1989-90), and therefore a more practical method for calculating points contribution is used.

13.23 The published points contributions are calculated by the ABS using the expenditure aggregates. In any period, the points contribution of a component to the All groups CPI index number is calculated by multiplying the All groups CPI index number for the period by the expenditure aggregate for the component in that period, and dividing by the All groups CPI expenditure aggregate for that period. Calculating points contribution using published data may give a different result to the points contribution derived using expenditure aggregates. Also, building up from the individual products' points contributions may give a different result from taking the All groups CPI index number and subtracting the points contributions for those products. The reasons for these differences are the different levels of precision used in the calculations.

13.24 The change in a component item’s points contribution from one period to the next provides a direct measure of the contribution to the change in the All groups CPI index resulting from the change in that component's price. In addition, information on points contribution, and points contribution change, is of immense value when analysing sources of price change, and for answering what-if type questions. Consider the following data extracted from the September quarter 2011 CPI publication.

 13.1 SELECTED VALUES FROM CPI PUBLICATION, SEPTEMBER QUARTER 2011 Index number Percentage change Points contribution Points change Item Jun qtr 2011 Sep qtr 2011 Jun qtr 2011 Sep qtr 2011 All groups 178.3 179.4 0.6 178.3 179.4 1.1 Electricity 248.4 267.7 7.8 3.55 3.83 0.3

13.25 Using only the index numbers themselves, the most that can be said is that between the June and September quarters 2011, the price of Electricity increased by more than the overall CPI (by 7.8% compared with an increase in the All groups CPI of 0.6%). The additional information on points contribution and points change can be used to:
• Calculate the effective weight for Electricity in the June and September quarters (given by the points contribution for Electricity divided by the All groups CPI index). For June, the weight is calculated as 3.55/178.3 x 100 = 2.0% and for September as 3.83/179.4 x 100 = 2.1%. Although the underlying quantities are held fixed, the effective weight in expenditure terms has increased due to the prices of Electricity increasing by more than the prices of all other items in the CPI basket (on average).
• Calculate the percentage increase that would have been observed in the CPI if all prices other than those for Electricity had remained unchanged (given by the points change for Electricity divided by the All groups CPI index number in the previous period). For September quarter 2011 this is calculated as 0.28/178.3 x 100 = 0.16. In other words, a 7.8% increase in Electricity prices in September quarter 2011 would have resulted in an increase in the overall CPI of 0.2 percentage points.
• Calculate the average percentage change in all other items excluding Electricity (given by subtracting the points contribution for Electricity from the All groups CPI index in both quarters and then calculating the percentage change between the resulting numbers which represent the points contribution of the ‘other’ items). For the above example, the numbers for All groups CPI excluding Electricity are: June, 178.3 - 3.55 = 174.8; September, 179.4 - 3.83 = 175.6; and the percentage change (175.6 - 174.8)/ 174.8 * 100 = 0.5. In other words, prices of all items other than Electricity increased by 0.5% on average between the June and September quarters 2011.
• Estimate the effect on the All groups CPI of a forecast change in the price of one of the items (given by applying the forecast percentage change to the item's points contribution and expressing the result as a percentage of the All groups CPI index number). For example, if prices of Electricity were forecast to increase by 25% in the December quarter 2011, then the points change for Electricity would be 3.83 x 0.25 = 1.0, which would deliver an increase in the All groups CPI index of 1.0/179.4 * 100 = 0.6%. In other words, a 25% increase in Electricity prices in December quarter 2011 would have the effect of increasing the CPI by 0.6%. Another way commonly used to express this impact is ‘Electricity’ would contribute 0.6 percentage points to the change in the CPI.

13.26 The following questions and answers illustrate the uses that can be made of the CPI.

Question 1:
• What would \$200 in the calendar year 2005 be worth in the September quarter 2011?

Response 1:
• This question is best interpreted as asking ‘How much would need to be spent in the September quarter 2011 to purchase what could be purchased in 2005 for \$200?’ As no specific commodity is mentioned, what is required is a measure comparing the general level of prices in the September quarter 2011 with the general level of prices in calendar year 2005. The All groups CPI would be an appropriate choice.
Because CPI index numbers are not published for calendar years, two steps are required to answer this question. The first is to derive an index for calendar 2005. The second is to multiply the initial dollar amount by the ratio of the index for September quarter 2011 to the index for calendar year 2005.
The index for calendar year 2005 is obtained as the simple arithmetic average of the quarterly indexes for March (147.5), June (148.4), September (149.8) and December (150.6) 2005 giving 149.1 rounded to one decimal place. The index for the September quarter 2011 is 179.4.
The answer is then given by:
\$200 x 179.4/149.1 = \$240.64.

Question 2:
• Household Expenditure Survey data show that average weekly expenditure per household on Food and non-alcoholic beverages increased from \$158.58 in 2003-04 to \$216.40 in 2009-10 (i.e. an increase of 36.5%). Does this mean that households, on average, purchased 36.5% more Food and non-alcoholic beverages in 2009-10 than they did in 2003-04?

Response 2:
• This is an example of one of the most valuable uses that can be made of price indexes. Often the only viable method of collecting and presenting information about economic activity is in the form of expenditure or income in monetary units (e.g. dollars). While monetary aggregates are useful in their own right, economists and other analysts are frequently concerned with questions related to volumes, for example, whether more goods and services have been produced in one period compared with another period. Comparing monetary aggregates alone is not sufficient for this purpose as dollar values can change from one period to another due to either changes in quantities or changes in prices (most often a combination).

13.27 To illustrate this, consider a simple example of expenditure on oranges in two periods. The product of the quantity and the price gives the expenditure in a period. Suppose that in the first period ten oranges were purchased at a price of \$1.00 each, and in the second period fifteen oranges were purchased at a price of \$1.50 each. Expenditure in period 1 would be \$10.00 and in period 2 \$22.50. Expenditure has increased by 125%, yet the volume (i.e. the number of oranges) has only increased by 50% with the difference being accounted for by a price increase of 50%. In this example all the price and quantity data are known, so volumes can be compared directly. Similarly, if prices and expenditures are known, quantities can be derived.

13.28 However what if the actual prices and quantities are not known? If expenditures are known, and a price index for oranges is available, the index numbers for the two periods can be used as if they were prices to adjust the expenditure for one period to remove the effect of the price change. If the price index for oranges was equal to 100.0 in the first period, the index for the second period would equal 150.0. Dividing expenditure in the second period by the index number for the second period, and multiplying this result by the index number for the first period provides an estimate of the expenditure that would have been observed in the second period had the prices remained as they were in the first period. This can easily be demonstrated using the oranges example:
\$22.50/150.0 x 100.0 = \$15.00 = 15 x \$1.00.

13.29 So, without ever knowing the actual volumes (quantities) in the two periods, the adjusted second period expenditure (\$15.00), can be compared with the expenditure in the first period (\$10.00) to derive a measure of the proportional change in volumes: \$15/\$10 = 1.50, which equals the ratio obtained directly from the comparison of the known volumes.

13.30 We now return to the question on expenditure on Food and non-alcoholic beverages recorded in the HES in 2003-04 and 2009-10. As the HES data relates to the average expenditure of Australian households, the ideal price index would be one that covers the retail prices of Food and non-alcoholic beverages for Australia as a whole. The price index which comes closest to meeting this ideal is the index for the Food and non-alcoholic group of the CPI for the weighted average of the eight capital cities. The Food and non-alcoholic index number for 2003-04 is (149.3 + 152.0 + 154.7 + 153.3)/4 = 152.3 and for 2009-10 it is (186.6 + 189.9 + 191.3 + 190.7)/4 = 189.6. Using these index numbers, recorded expenditure in 2009-10 (\$216.40) can be adjusted to 2003-04 prices as follows:
\$216.40/189.6 x 152.3 = \$173.82.

13.31 The adjusted 2009-10 expenditure of \$173.82 can then be compared to the expenditure recorded in 2003-04 (\$158.58) to deliver an estimate of the change in volumes. This indicates a volume increase of 9.6%.

Constructing analytical series

13.32 Although the ABS produces a wide range of indexes from the CPI, there may be occasions when none of these exactly suit a user’s special requirement. In this case the user may wish to construct their own index based on component indexes of the CPI. For example, suppose a researcher is interested in how petrol prices moved relative to the price of all other consumer goods and services. As the All groups CPI includes Automotive fuel, it is not the ideal measure for comparative purposes, so the researcher wishes to compile an All groups CPI excluding Automotive fuel index. Table 13.2 shows the construction of a time series of All Groups CPI excluding Automotive fuel index.

13.33 The index can be compiled directly by subtracting index points contributions (see paragraph 13.16); however, in constructing an index of this type over multiple series, allowance should be made for the change in weights with each CPI series through the calculation of a link factor.

13.34 The following formula is used to calculate an All groups CPI Index excluding a particular component:

where IAg-Af is the Index number for All groups CPI excluding Automotive fuel, IAg is the All groups CPI index number, PCAf is the Points Contribution for Automotive fuel and LF is the link factor.

13.35 The link factor can be calculated as follows:

where the 0 and 1 superscript represent the earlier and later series being calculated respectively.

13.36 The purpose of the link factor is to create a continuous series, allowing for changes in the component weights between the different series.

13.37 When the 16th series CPI was introduced in the September quarter 2011, Automotive fuel contributed 7.55 index points to the All groups CPI index, based on 15th series weights, and 6.33 index points based on 16th series weights. The All groups CPI index was 178.3. Thus the index for All groups CPI excluding Automotive fuel is calculated as 178.3 - 7.55 = 170.8 under the 15th series, and 178.3 - 6.33 = 172.0 under the 16th series for that quarter.

13.38 The link factor between the 15th and 16th series is calculated using equation 13.2 as follows:
LF = (178.3 - 6.33) / (178.3 - 7.55) = 1.007145.

13.39 The 16th series index number for the quarter is then divided by the link factor to give a final index number 172.0/1.007145 = 170.8. Each index number calculated from the 16th series points contributions must be divided by the link factor to give a continuous index.

 13.2 CONSTRUCTION OF AN ANALYTICAL SERIES USING THE LINK FACTOR All Groups CPI Automotive fuel - Points contribution All Groups CPI excluding Automotive fuel Link factor All Groups CPI excluding Automotive fuel Period 15th series 16th series 15th series 16th series Jun qtr 2005 148.4 5.62 142.8 1 142.8 Sep qtr 2005 149.8 6.26 143.5 1 143.5 Dec qtr 2005 150.6 6.21 144.4 1 144.4 Mar qtr 2006 151.9 6.29 145.6 1 145.6 Jun qtr 2006 154.3 7.00 147.3 1 147.3 Sep qtr 2006 155.7 6.92 148.8 1 148.8 Dec qtr 2006 155.5 6.06 149.4 1 149.4 Mar qtr 2007 155.6 6.15 149.5 1 149.5 Jun qtr 2007 157.5 6.71 150.8 1 150.8 Sep qtr 2007 158.6 6.46 152.1 1 152.1 Dec qtr 2007 160.1 6.93 153.2 1 153.2 Mar qtr 2008 162.2 7.31 154.9 1 154.9 Jun qtr 2008 164.6 7.94 156.7 1 156.7 Sep qtr 2008 166.5 8.10 158.4 1 158.4 Dec qtr 2008 166.0 6.63 159.4 1 159.4 Mar qtr 2009 166.2 6.09 160.1 1 160.1 Jun qtr 2009 167.0 6.31 160.7 1 160.7 Sep qtr 2009 168.6 6.56 162.0 1 162.0 Dec qtr 2009 169.5 6.38 163.1 1 163.1 Mar qtr 2010 171.0 6.65 164.4 1 164.4 Jun qtr 2010 172.1 6.79 165.3 1 165.3 Sep qtr 2010 173.3 6.54 166.8 1 166.8 Dec qtr 2010 174.0 6.68 167.3 1 167.3 Mar qtr 2011 176.7 7.26 169.4 1 169.4 Jun qtr 2011 178.3 7.55 6.33 170.8 172.0 1.007145 170.8 Sep qtr 2011 179.4 6.24 173.2 1.007145 171.9 Note: Base period of all indexes 1989-90 = 100.0.

Precision and rounding

13.40 To ensure consistency from one publication to the next, the ABS uses a set of rounding conventions or rules for calculating and presenting the results. These conventions strike a balance between maximising the usefulness of the information for analytical purposes, and retaining a sense of the underlying precision of the estimates. Users need to consider these conventions when using the CPI for analytical or other special purposes.

13.41 Index numbers are always published relative to a base of 100.0. Index numbers and percentage changes are always published to one decimal place, and the percentage changes are calculated from the rounded index numbers. Index numbers for periods longer than a single quarter (e.g. for financial years) are calculated as the simple arithmetic average of the rounded quarterly index numbers.

13.42 Points contributions are published to two decimal places. Change in points contributions is calculated from the rounded points contributions. Rounding differences can arise in the points contributions where different levels of precision are used.