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FEATURE ARTICLE: REVIEW OF THE CONSUMER PRICE INDEX INTERNATIONAL TRADE EXPOSURE SERIES
The CPI International Trade Exposure series measures the contributions of domestic (non-tradables) and imported (tradables) inflation to household inflation.
The CPI is a measure of price change. Ideally, therefore, the classification of CPI ECs as tradables or non-tradables would be determined by assessing the contribution of the domestic and imported impacts to the overall price change (rather than the contribution to the price level) (footnote 1) . However, in practice, this approach is difficult to implement.
Data limitations affect the ability to quantify the impact of domestic and international forces on the price change. Therefore, the predominant method used to assist in the classification of CPI ECs relies on the internationally traded contributions on the price level of each CPI EC. Put simply, the classification between tradables and non-tradables distinguishes ECs by the degree to which their prices are affected by domestic developments and international competition. Additional analysis is also conducted to determine the final classification.
METHOD AND DATA SOURCES
Three steps were used to classify the CPI ECs as either tradables or non-tradables:
2. Utilise supplementary data to determine the appropriateness of the default classification; and
3. Analyse the contribution of domestic taxes and subsides.
Step 1: Assess the level of imports and exports
The ratio of imports and exports to Australian production for each EC was calculated and compared against a threshold. If this threshold was exceeded, either by imports, exports or both, then the EC was classified (by default) as tradable.
Data on imports, exports and Australian production were sourced from the 2013-14 Input-Output tables (cat. no. 5209.0.55.001). These data were adjusted to exclude expenditure by international tourists. Data from the 2013-14 Tourism Satellite Account (cat. no. 5249.0) was used to exclude expenditure by international tourists from the data in the Input-Output (I-O) tables. These data were then mapped from the I-O product classification to the CPI Commodity Classification.
Step 2: Utilise supplementary data
The use of a threshold in step 1 provided a 'rule of thumb' in an attempt to simply and transparently classify each of the CPI ECs. However, it was also important to assess the appropriateness of each EC’s classification from a consumer price change perspective.
An assessment of the appropriateness of the classification of each EC using the threshold approach was conducted, particularly for those ECs which were close to the threshold. The threshold approach was supplemented by information on correlations with exchange rates, supporting trade data, significant world events and the regulatory environment within which prices are set.
Step 3: Analyse the contribution of domestic taxes and subsides
Changes to taxes and subsidies are a domestic contribution to inflation. Therefore, the contribution of taxes and subsidies on the price paid by consumers was estimated to determine the classification of ECs as either tradables or non-tradables. Data from the 2013-14 Input-Output tables were used to determine the contribution of taxes and subsidies to final demand (footnote 2) . Where taxes and subsides make a large contribution to the prices paid by consumers on products within an EC, these ECs were classified as non-tradables.
For step 1, a number of thresholds were tested to identify the optimal level where the classification of ECs as tradables was deemed appropriate. At a threshold value of ten per cent, 53 ECs were considered tradables, which is comparable to the 47 that are currently classified as tradables. The ECs that were considered non-tradables at this threshold were found to largely consist of services, with only a handful of goods.
Based on this analysis, a ten per cent threshold was determined as the optimal level of international exposure for classifying the ECs as tradables or non-tradables.
Using the ten per cent threshold, the default classification showed six ECs changing classification from non-tradables to tradables:
In the case of Waters, soft drinks and juices, Gas and other household fuels and Therapeutic appliances and equipment, there was ample evidence that the prices of products within these ECs being influenced by international competition. As part of the 2011 review it was decided to classify Gas and other household fuels as non-tradable due to the prices being highly regulated. However, more recently, the price of gas has become increasingly exposed to international competition, coinciding with a surge in liquefied natural gas exports. As a result, Gas and other household fuels will change classification from non-tradable to tradable.
Step 2 involved using supplementary data, which showed that there was a strong case to leave the classification of Telecommunication equipment and services and Domestic holiday travel and accommodation as non-tradables. In the case of Telecommunication equipment and services, imports are predominately mobile phone handsets, which are commonly bundled together with other products, most of which are services and considered non-tradable. For Domestic holiday travel and accommodation, prices are largely unaffected by international competition. Although a significant proportion of Domestic holiday travel and accommodation are exports, the range of services is something that cannot be met by producers in another country.
Further analysis of two ECs: Breakfast cereals and Newspapers, magazines and stationery, were added to the list of changes, with both ECs being close to the ten per cent threshold.
In analysing taxes and subsides data, step 3 saw three ECs re-classified from tradables to non-tradables: Spirits, Tobacco, and Pharmaceutical products, while the Beer EC has remained as non-tradable. Any changes to the taxes or subsidies to the products within these ECs will be reflected as a domestic impact and captured in the non-tradables series.
As a result of this review, a list of the ECs changing classification is shown in table 1. In all, there are five ECs changing from non-tradables to tradables, and three ECs changing from tradables to non-tradables.
It is important to regularly review and update the International Trade Exposure series as the Australian economy’s exposure to international competition changes over time. While the fundamental concern of this analysis was the source (domestic or imported) of inflation, the method used in this analysis focused on the price level rather than the price change. A ten per cent threshold was assessed and deemed an appropriate level of exposure to international competition to be classified as tradable.
The ten per cent threshold was used as a rule of thumb to classify the CPI ECs as either tradables or non-tradables. Further analysis using supplementary data, and an assessment of the contribution of domestic taxes and subsides was conducted to ensure the appropriateness of each EC's classification. The end result was five ECs changing classification from non-tradables to tradables, and three ECs changing classification from tradables to non-tradables.
1 These two perspectives can result in the same EC being classified differently. An obvious example of this is tobacco. Tobacco is largely imported, and therefore assessing its price level one would classify it as tradable. However, the price change of tobacco is predominantly due to changes in the domestic taxes on tobacco (e.g. the federal excise tax), which on this basis would see it classified as non-tradable. <back
2 For the contribution of taxes, the purchasers' price was used. This is the amount paid by the purchaser, excluding any deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. The purchaser’s price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place. Australian System of National Accounts, 2014-15 (cat. no. 5204.0) <back
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