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6470.0 - Information Paper: Introduction of the 16th Series Australian Consumer Price Index, 2011  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 22/09/2011  First Issue
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CHAPTER 4: DESCRIPTION OF THE 16TH SERIES WEIGHTING PATTERN: SOURCES AND METHODS

Description of the 16th series weighting pattern: sources and methods
4.1 A comprehensive description of the CPI methodology is outlined in Australian Consumer Price Index: Concepts, Sources and Methods, 2009 (cat. no. 6461.0). This will be updated to reflect the changes in the 16th series CPI and is scheduled for release on 7 December 2011.

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

4.3 In determining the composition of the CPI basket (and item weights), the objective is to reflect the contemporary experiences of households. The starting point for compiling the weights for the 16th series CPI was the results of the ABS 2009–10 Household Expenditure Survey (HES). The HES obtained information on the spending habits of Australian households throughout 2009–10.

HES data
4.4 The 2009–10 HES was a sample of 9,774 households. 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. An interview questionnaire also collected information on household characteristics, expenditures common to all household members (e.g. health service payments) and irregular or infrequent expenditures. The recall period for the irregular or infrequent expenditures varied: for 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, insurance, overseas holiday travel, house alterations and additions.

4.5 The 2009–10 HES was collected under the current Australian Standard Geographical Classification (ASGC). The next HES is scheduled to be undertaken in 2015–16 using the new Australian Statistical Geography Standard (ASGS) with inclusion in the CPI from the September quarter 2017.

4.6 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 Household Expenditure Classification, Australia (cat. no. 6446.0.55.001) on 26 October 2011.

4.7 The CPI to HEC correspondence was applied to the HES data to derive household average weekly expenditure for 2009–10 at the expenditure class level. The average weekly expenditure was used to analyse both the 2009–10 expenditure and the changes since the 2003–04 HES.

4.8 Although the HES provides a comprehensive coverage of household expenditure, various adjustments were required to be made to the HES average weekly expenditure for use as the CPI weights. In most cases the adjustments to expenditure were made without compensating adjustments to other expenditure in the CPI basket. The implication is that changes in such expenditure were assumed to have come from, or gone into savings.

Adjustments to HES data

Under–reporting of alcohol and tobacco expenditures in the HES
4.9 Historically, HES expenditure on alcohol and tobacco was 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 national factors were applied to the HES expenditure estimates for each capital city. The 2009–10 HES has estimated expenditure for alcohol at a little over half and tobacco at a little under half of the respective national accounts estimates. This was a very similar sized adjustment that was used for the 15th series CPI.

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

Audio, visual and computing equipment
4.11 The 2009–10 HES data provided the latest information on household expenditure on audio, visual and computing equipment which was then price updated to the June quarter 2011, as described in paragraph 3.9 above. However, for audio, visual and computing equipment this approach may lead to underestimation of the weight in the CPI due to the relatively high volume growth in the quality (size and features) of these high technology goods compared to other products in the CPI. Therefore, a volume increase of around 15% was calculated from the National Accounts HFCE components between 2009–10 and June quarter 2011.

Insurance
4.12 For the purpose of measuring household price inflation, the weight for general insurance in the CPI should reflect the cost of the service provided by insurers (gross premium less claims) rather than the value of gross premiums paid. However, as it was only possible for the HES to collect the gross premiums, the HES gross premiums were adjusted by the proportion of the gross premium that represents the insurance service. This proportion was derived using information collected by the Australian Prudential Regulation Authority (APRA) and from insurance companies. Expenditures funded by claims were added back to the appropriate items by calculating the ratio of claims payments relative to premiums, using APRA and insurance company data and applying the ratio to the HES gross premiums.

Salary sacrifice
4.13 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. In the 2009–10 HES, the salary sacrifice question module was expanded to collect more detailed information on motor vehicles purchased via a salary sacrifice arrangement. In addition, respondents were instructed to exclude expenditure on motor vehicles and related items for those motor vehicles purchased through salary sacrifice from the motor vehicle question modules within the household questionnaire, to ensure no double counting.

4.14 The items that have been adjusted for salary sacrifice are motor vehicles and computers. Salary sacrifice expenditure on child care was not included as it was regarded as insignificant. To ensure the expenditure on motor vehicles includes all motor vehicles purchases (i.e. including via salary sacrifice) some adjustment is needed to the relevant HES items. Therefore salary sacrifice amounts reported against vehicles were allocated to motor vehicle purchases, registration, insurance, motor vehicle repair and servicing, and automotive fuel.

Outlier adjustments
4.15 The HES data was compared across capital cities and over time to validate the 16th series expenditure at the expenditure class level. The HES expenditure in 2003–04 was revalued to 2009–10 dollars to derive the volume changes between the two HES reference years and compared to the 2009–10 HES.

4.16 A small number of unit record adjustments were made in the smaller capital cities where HES sample sizes are smaller and, in general, the standard errors are larger. The outlier adjustment 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 subjective judgement based on market intelligence.

Expenditure not sourced from HES

New dwelling purchase by owner–occupiers
4.17 New dwelling purchase by owner–occupiers in the CPI includes the cost of 'net additions of household sector dwellings' as a measure of owner–occupier housing costs which 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).

4.18 The net expenditure on new dwelling purchase by owner–occupiers house acquisition was estimated by applying the average value of private dwelling completions by State for 2009–10 published in Building Activity, Australia (cat. no. 8752.0) to the net change in the number of owner–occupier households. The net additions are calculated by using data from Household and Family Projections, Australia (cat. no. 3236.0) to move forward the Census 2006 capital city counts of owner–occupied households. In line with standard practice relating to the inclusion of subsidies in the CPI, subsidies paid to first–home buyers as part of the Commonwealth government's 'First Home Owners Scheme' and 'First Home Owners Boost' were treated as negative expenditure and subtracted from the new dwelling purchase by owner–occupiers house acquisition expenditure.

4.19 Expenditure on other items that are included in new dwelling purchase by owner–occupiers are ‘Alterations and additions’ and ‘Installed appliances’. This expenditure was obtained from the 2009–10 HES and added to the estimate for house acquisition to provide the total expenditure on new dwelling purchase by owner–occupiers.

Motor vehicles
4.20 The data source for Motor vehicles changed for the 16th series CPI. The weight for motor vehicles was derived from the National Accounts HFCE data. This was done to accommodate a coverage change. In the 16th series CPI the weight for motor vehicles will include 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. In the 15th series CPI, only new cars were included and the weight was derived from the 2003–04 HES data.

Higher Education Loan Program (HELP)
4.21 The HES higher education item includes HELP payments made by households up front plus any HELP repayments made through the taxation system during the reference period. This measure 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 payment) plus fees for education services acquired during the period but deferred to be paid at a later date.

4.22 To align the household expenditure on tertiary education fees, in the CPI, HELP expenditures were calculated using data from the Department of Education, Employment and Workplace Relations (DEEWR) on the total upfront and deferred fees and the number of HELP paying university students.

Financial services
4.23 Expenditure on financial services cannot be sourced from the HES as it was 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. Detailed information on Financial services in the 16th series CPI is contained in Appendix 4.

Deposit and loan facilities (direct charges)
4.24 Expenditure on Deposit and loan facilities (direct charges) was 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 (detailed information on Financial services in the 16th series CPI is contained in Appendix 4).

Other financial services
4.25 Other financial services include real estate agent services, legal and conveyancing services, stockbroking services and taxes on property transfers.

4.26 Expenditure on real estate agent services was derived from property transaction data over the period 2009–10 and unpublished ABS survey data on real estate agent fees.

4.27 Expenditure on legal and conveyancing services was derived from the National Accounts ownership transfer costs. This represents a change from the 15th series which used ABS income data from
Legal Practices, Australia, 2001–02 (cat. no. 8667.0).

4.28 National Accounts HFCE data was used to derive an estimate of expenditure on stockbroking services.

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

4.30 The ABS will investigate methodologies for other significant financial services that are currently not covered in the CPI (e.g. superannuation charges) and introduce them into the CPI when the ABS is satisfied that the methodology and data are sufficiently robust to produce high quality estimates.


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