Underlying inflation measures
The Trimmed Mean and Weighted Median provide important insights into underlying inflation and the health of the Australian economy. These measures are derived from the Consumer Price Index (CPI) by removing atypical movements from the quarterly CPI, and recalculating a quarterly movement. Full details of the methods can be found in Explaining the Trimmed Mean and Weighted Median.
The COVID-19 pandemic has resulted in some extremely large price changes, such as the significant fall in automotive fuel prices and the provision of free childcare for Australian families. The underlying inflation measures reduce the influence of these large price movements, and thereby provide a measure of medium-term inflation.
As discussed in Measuring the CPI during a time of COVID-19, in the June 2020 quarter, prices for five series were imputed to have a quarterly change equal to that of the headline CPI, rather than being measured. The five series were: Urban transport; Domestic holiday travel and accommodation; International holiday travel and accommodation; Sports participation; and Other recreational, sporting and cultural services. These five series contribute a weight of 9 per cent to the CPI.
Imputing price movements for these series presented the challenge of how they should contribute to the underlying inflation measures. The two options considered by the ABS were:
1. Use all 87 CPI series, including the five imputed series, in the calculation of the Trimmed Mean and Weighted Median.
2. Exclude the five imputed series and calculate the Trimmed Mean and Weighted Median using the remaining 82 CPI series.
In order to maintain consistency in the methods used, the ABS selected option 1 for the official measures presented on the Main Features page of the June quarter CPI release. In this article, table 1 presents the quarterly and annual movements for both options 1 and 2.
Table 1. June quarter 2020 Trimmed Mean and Weighted Median, including and excluding imputed series
Including imputed series (Option 1)
Excluding imputed series (Option 2)
By construction, the price change for the five imputed series is the same as for the headline CPI. As the headline CPI recorded a fall of -1.9 per cent in the quarter, including the five imputed series has a downward impact on the underlying inflation measures. Excluding these series from the calculation means the underlying inflation measures for option 2 are slightly higher.
Chart 1 shows that when included in the calculations, only one and a portion of another of the imputed series are trimmed from the Trimmed Mean, while the remaining imputed series contribute to the movement. Chart 2 shows the calculation of the two measures when the five imputed series are excluded.
Chart 1. June quarter Trimmed mean and Weighted median including imputed series
Chart 2. June quarter Trimmed mean and Weighted median excluding imputed series