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The Australian CPI: A Contemporary Measure of Household Inflation
17th SERIES CPI RE-WEIGHT
New Australian spending patterns will be implemented in the December quarter 2017 Consumer Price Index, Australia (cat. no. 6401.0); and the Selected Living Cost Indexes, Australia (cat. no. 6467.0), due for release on 31 January 2018 and 7 February 2018 respectively. These new Australian household spending patterns will be based on 2015-16 Household Expenditure Survey, Australia: Summary of Results (HES) (cat. no. 6530.0) data.
To produce aggregate measures of price change, the role of household spending patterns (also referred to as expenditure weights) is to reflect the relative importance of goods and services to the total expenditure of Australian households. National Statistical Offices (NSOs) periodically update expenditure weights to accurately reflect changing spending patterns of households.
Household spending patterns have historically been updated every five to six years. These updates follow the release of data from HES.
Additional information relating to new household spending patterns can be found in:
ANNUALLY RE-WEIGHTING THE CPI
From the December quarter 2018, the spending patterns used to compile the Australian CPI will be updated annually using Household Final Consumption Expenditure (HFCE) data from the Australian National Accounts.
A component of the research program to Enhancing the Australian CPI: A roadmap (cat. no. 6401.0.60.001) included a review of the frequency of weight updates to the CPI. Research into alternate data sources identified the availability of annual HFCE data from the National Accounts as an opportunity to update the CPI spending patterns more frequently. The use of HFCE data is endorsed by the International Labour Organisation (ILO) when the time interval between household surveys is large, and is used by other NSOs, including the Office for Statistics in the United Kingdom and Statistics Netherlands.
The ABS consulted broadly regarding the proposal to use HFCE data to annually re-weight the CPI, and all submissions and stakeholder feedback were supportive of the proposal. The use of HFCE data will also provide greater coherence between macro-economic statistics, as well as aligning with international standards.
HFCE data is not available for different household groups. The ABS will continue to investigate alternate data sources and methods for the different household types to increase the frequency of weight updates for the SLCIs.
For more information see:
MAKING GREATER USE OF TRANSACTIONS DATA
From the December quarter 2017, a new method will be used to compile components of the Australian CPI. This new method, known as a multilateral index method, utilises a census of products available in big datasets; uses expenditure data to weight products; and reduces data collection costs.
The launch of barcode scanner technology in Australia during the 1970s, and its growth in the 20th century, has enabled retailers to capture detailed information on transactions at the point of sale. Transactions data is high in volume and contains detailed information about individual transactions including: date of purchase, quantities purchased, product descriptions, and value of products purchased. As such it is a rich data source to NSOs that can be used to enhance their statistics, reduce provider burden, and reduce associated costs of physically collecting data.
From the March quarter 2014, the ABS significantly increased its use of transactions data to compile the Australian CPI which now accounts for approximately 25 per cent of the weight. The current methodology used by the ABS replaces point-in-time prices for certain products (previously collected by field collectors) with a unit value (from transactions data).
While current methods used to compile the CPI represent a significant enhancement on traditional practices, opportunities exist to further enhance the methods used in the Australian CPI. This includes using all the products available in the datasets (rather than a sample of products) and weighting products by their economic importance (rather than using unweighted price indexes).
While transactions data provide opportunities to enhance the CPI, they also create methodological challenges. Limitations associated with the use of traditional bilateral index formulae have prompted NSOs and academics to research new methods for compiling price indexes from transactions data.
Research by the ABS and price index experts has led to a consensus that multilateral methods are the most effective methods to make full use of all the information in transactions data. This is because multilateral methods have the following advantages:
a) Using a census of products available in datasets
b) Weighting products at the product and elementary level by expenditure share
c) Price indexes that are free of 'chain drift' (footnote 1)
d) Reduced resources to produce indexes.
For more information see:
The ABS uses several modes of collection to obtain prices for the Australian CPI. These include: personal visits, online, telephone, and administrative data, including transactions data. More recently, with the growth of online retailing, pricing information is able to be obtained from websites. Advances in technology and automated scraping software, enables large scale data collection from the web. This is referred to as web scraping.
Web scraping is a technique employed to extract large amounts of data from websites. Prices can be collected as frequently as desired for all products using purpose-built programs that scan the websites of retailers, find the relevant information and store the information in a time series. The process can be run automatically and as frequently as desired (daily / weekly), providing high frequency information. As such it is deemed to be a rich source of pricing information to statistical agencies.
A significant number of statistical agencies, including Statistics Netherlands, the Office for National Statistics in the United Kingdom, Statistics New Zealand, Statistics Canada and many European Union statistical agencies (supported by funding from EuroStat), have begun web scraping price data. This has resulted in the release of a number of research papers and experimental series.
The ABS has been utilising new technologies to collect pricing information since May 2016. Web scraping allows approximately 500,000 prices to be collected per week compared to 1,000 prices with traditional in-field collection, providing an opportunity to significantly enhance the sample of products and prices collected. From the June quarter 2017 the ABS implemented web scraped data into the CPI, using an average calculated price of an item over a given period (generally a month).
While this has enhanced the CPI, it is recognised that more can be done with web scraped data. The ABS is investigating new methods that will facilitate greater use of web scraped data in the compilation of the Australian CPI. As research progresses the ABS will consult with experts and inform stakeholders.
THE DIGITAL ECONOMY
The ABS continues to monitor developments in the economy, emerging industries and household expenditure patterns. Digital products and services (e. g. streaming services), and share economy businesses, for example, have experienced significant growth in recent years and have been incorporated into the CPI as they have established a representative share of consumer expenditure. This is achieved as part of the CPI rolling review program which assesses and updates the sample of representative products, the data sources and the relative importance of the goods and services being priced in the CPI.
After extensive research and consultation the ABS will now implement aspects of the enhancement program discussed in Enhancing the Australian CPI: A roadmap (cat. no. 6401.0.60.001). This will occur in the December quarter 2017 release of the Consumer Price Index, Australia (cat. no. 6401.0). The ABS will continue to examine new methods and data sources in order to reflect the contemporary economy and consumer preferences in the Australian CPI.
Footnote 1 'Chain drift' is where the index fails to return to parity after prices and quantities revert back to their original values. 'Chain drift' is caused by quantities spiking when consumers stock up goods that are on sale, and not returning to their normal level immediately after the sales period. back>
Consumer Price Index (CPI)
At the 8 caps level, average weekly expenditure (AWE) per household grew by $222.88 between June 2011 and September 2017, from $1,371.30 to $1,594.18 (+16.3%). Increases were recorded in all capital cities and across all CPI groups (Graph 1). Over the same period, wages growth was 17.1% (WPI).
At the 8 caps level, households continue to spend the most on housing, followed by food and non-alcoholic beverages; and recreation and culture. Although food and non-alcoholic beverages remains one of the most heavily weighted CPI groups, its weight fell between the 16th and 17th series. Communication; and clothing and footwear represent the smallest portions of the household basket (Graph 2).
Housing recorded an increase in weight, with a greater proportion of expenditure on rents, partially offset by a fall for new dwelling purchase by owner-occupiers. Rents rose in weight from 6.71% to 7.22%, with strong house price growth leading to an increase in the proportion of renters in Australia's capital cities, and rises in rental prices over the period.
The weight of new dwelling purchase by owner-occupiers fell from 8.67% to 7.78%, but it still remains the highest weighted expenditure class in the CPI. Although there was an increase in the rate of additions to the owner-occupier dwelling stock over 2015-16, this is being offset by cheaper dwellings such as apartments being constructed, keeping expenditure growth down. The increased use of imported materials and prefabricated structures is also contributing to subdued prices.
The education group (+1.09pp) recorded the largest increase in weight over the period, although it still remains a small component of household spending (4.27%). Strong increases in expenditure were seen across all forms of education, due to higher student numbers, particularly in private education, and increased costs.
Transport decreased as a proportion of household spending, experiencing the largest fall of the groups (-1.23pp). This was driven by lower prices for automotive fuel; and motor vehicles.
Other notable changes in weights include:
Consumer Price Index
GRAPH 1 AVERAGE WEEKLY EXPENDITURE BY CITY
GRAPH 2 CPI WEIGHTS – GROUP COMPARISON
Selected Living Cost Indexes (SLCIs)
At the 8 caps level, AWE grew for all population subgroups between the 16th and 17th series. The increase ranged from $71.42 for PBLCI households, to $204.75 for employee households.
Housing; and food and non-alcoholic beverages remain the significant components of household expenditure for most population subgroups. All subgroups recorded an increase in weight for housing, driven by rents and utilities. Other government transfer recipients recorded the most significant rise, due to having a greater proportion of renters.
The weight of health also increased across all population subgroups, with self-funded retirees; and age pensioners showing the largest movements, increasing from 8.53% to 10.31% and 8.85% to 10.22% respectively. These rises were driven by medical and hospital services, following significant increases in private health insurance premiums over the period.
Conversely, clothing and footwear has fallen as a proportion of expenditure across all population subgroups. This is driven predominantly by price falls in garments as a result of increased competition from online and international entrants to the Australian retail market.
Changes in the weights for the insurance and financial services group varied across the subgroups, driven by the mix of owner-occupier and renter households. Employee; and other government transfer recipient households recorded falls in weight driven by lower interest charges, with the cash rate reaching record lows during 2015-16. Exposure to mortgages is lower for the remaining household types and combined with increases in gross premiums for insurance, resulted in increases in their weights for insurance and financial services.
GRAPH 3 SLCIS – AWE COMPARISON
CPI GROUP LEVEL ANALYSIS
Food and non-alcoholic beverages group
The weight for the food and non-alcoholic beverages group decreased 0.75pp to 16.09%. This reflects the strong competition that has occurred on food items over recent years, which has kept prices, and therefore expenditure growth low. Compared to the 16th series, weights fell across most food products.
Fruit recorded the most significant fall in weight, down 0.53pp. The 16th series weight was impacted by adverse weather conditions, which affected supply and pushed up prices. These conditions have not been as prevalent or as long-lived during the 17th series, resulting in the weight for fruit returning to more normal levels.
Partially offsetting the falls was restaurant meals, which recorded the strongest increase in weight within the group (+0.51pp). This is supported by a strong increase in volumes, as consumer preferences shift from goods towards experiences.
Alcohol and tobacco group
The alcohol and tobacco group experienced a slight increase in weight in the 17th series to 7.09%.
The predominant contributor to the increase was tobacco, which remains the most heavily weighted EC within the alcohol and tobacco group. Although volumes fell, continued rises in the excise tax have resulted in expenditure and subsequently weight increases between the 16th and 17th series.
Partially offsetting the rise in tobacco was a fall in the weight for beer. This is driven by volume decreases as consumer preferences shift towards wine and ciders.
Clothing and footwear group
The weight for the clothing and footwear group decreased 0.43pp to 3.55%, and is now the second smallest component of the household basket, just above spending on communication.
The main contributors to the fall were garments for men; and garments for women. Although volumes grew, competition from online and international brands opening in Australia have driven prices lower, leading to falls in the weights.
The housing group remains the major component of household spending, with a weight of 22.68%, increasing 0.38pp.
The main contributor to the rise was rents, up 0.51pp. This reflects strong house price growth over the last 5 years, leading to an increase in the proportion of renters in Australia’s capital cities. 2016 Census data shows that 30.2% of occupied private dwellings are rented, up from 28.8% in 2011. The strong demand for rental properties has also impacted prices, with price growth of 20.2% between 2009-10 and 2015-16.
The weight of utilities, comprising water and sewerage; electricity; and gas and other household fuels, increased 0.45pp to 4.06%. This increase was predominantly price driven, with prices for utilities rising 45.6% between 2009-10 and 2015-16. Volumes have remained relatively subdued over this period, with increased scrutiny on energy costs resulting in consumers becoming more aware of and conservative in terms of usage.
These rises were partially offset by a fall in the weight of new dwelling purchase by owner-occupiers. This remains the major component of housing costs, and is still the most heavily weighted EC in the CPI, despite a fall in weight of 0.89pp. Although there has been an overall increase in the rate of additions to the owner-occupied dwelling stock since 2009-10, there has also been a compositional shift, led by strong price growth in detached houses, towards cheaper apartment living.
The increase in apartment construction has delivered dwellings that are less expensive than low density housing, due to increased supply and lower construction costs brought on by cheaper inputs. Coupled with price growth for other residential construction rising at a slower pace compared to house construction between 2009-10 and 2015-16, this has resulted in a decrease in the weight of new dwelling purchase by owner-occupiers in the CPI.
Furnishings, household equipment and services group
The furnishings, household equipment and services group recorded an increase in weight of 0.29pp to 9.39%.
The main contributor to the rise was child care (+0.66pp). Increased demand for child care services, driven in part by higher participation of parents in the workforce, has led to strong price and volume growth. Changes in industry standards have also contributed to price growth over the period, including increased educator-to-child ratios and higher qualification requirements for teachers.
Partially offsetting the rise in child care were falls for a number of the goods components, including furniture (-0.24pp); household textiles (-0.12pp); and major household appliances (-0.09pp). Despite increased building activity over the period leading to growth in volumes, expenditure has been constrained by subdued prices as a result of retail competition and imports.
The impact of supermarket price competition is also being seen in this group, with cleaning and maintenance products; personal care products; and other non-durable household products all decreasing as a proportion of household spending, despite increases in volumes.
The health group recorded an increase in weight of 0.14pp to 5.43%.
The main driver was medical and hospital services (+0.31pp), due to strong annual increases in health insurance premiums over the period. Premiums increased on average 5.71% per year between 2010 and 2016 at the industry weighted level.
The rise in medical and hospital services was partially offset by a fall in the expenditure share of pharmaceutical products (-0.14pp). This is driven by subdued growth in prices as additional medicines are added on to the Pharmaceutical Benefits Scheme (PBS) schedule, as well as government initiatives such as Simplified Price Disclosure putting downward pressure on prices. A more recent initiative allowing pharmacists to offer a discount of up to $1.00 on scripts where a co-payment is made is also contributing to the fall in weight between the 16th and 17th series.
The transport group fell 1.23pp to a weight of 10.32%. This represents the largest fall of all the groups.
The main driver was automotive fuel (-0.77pp) as a result of falls in the world oil price. This was followed by a decline in motor vehicles (-0.47pp), driven by increased competition between brands for sales, manufacturing changes which have enabled cars to be built more cheaply, and a higher proportion of imported cars being sold.
The communication group fell 0.37pp to a weight of 2.68%, remaining the lowest weighted component of the CPI basket.
The main driver was telecommunication equipment and services (-0.34pp). Rises in volumes as consumers increasingly embracing technology and mobility were offset by falls in prices from technological advancement and competition between providers.
The weight for postal services also fell, driven by falls in volumes as consumers utilise other means of communication. The EC is now the lowest weighted EC in the CPI, along with footwear for infants and children.
Recreation and culture group
The weight for the recreation and culture group rose 0.15pp between the 16th and 17th series. Results were mixed at the EC level.
The main contributors to the rise were international holiday travel and accommodation (+0.86pp), followed by domestic holiday travel and accommodation (+0.21pp), with both components being supported by increased prices and volumes. This reflects the trend of consumers prioritising experiences over goods, and overseas holidays becoming relatively more affordable over recent years. Low automotive fuel prices are also contributing to increased domestic travel volumes.
The largest decrease was seen in audio, visual and computing equipment (-0.34pp). This was price driven as technological advancement delivers additional features at increasingly lower prices. This was followed by audio, visual and computing media and services (-0.28pp); newspapers, magazines and stationery (-0.20pp); and books (-0.15pp), as consumers increasingly go online for content.
The education group recorded the largest increase in weight in the 17th series, although it still remains a small component of household spending (4.27%).
Secondary education recorded the largest increase, up 0.44pp to 1.70%. This was followed by preschool and primary education, up 0.40pp to 0.92% and tertiary education, up 0.25pp to 1.65%.
These increases were due to higher student numbers (particularly in private education) and increased costs.
Insurance and financial services group
The insurance and financial services group rose 0.72pp to 5.80%, driven by other financial services, up 1.10pp to 4.02%. This was primarily due to higher expenditure on stamp duty, driven by house price growth, and supported by volume increases.
Partly offsetting the rise in other financial services were insurance; and deposit and loan facilities (direct charges), down 0.21pp and 0.16pp respectively. Increased competition in these industries is contributing to subdued expenditure growth.
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