Measuring Non-discretionary and Discretionary Inflation

In November 2020, the ABS used Consumer Price Index (CPI) data to produce two experimental measures of Non-discretionary and Discretionary inflation. Using the same approach, this article extends the analysis of these two measures back to 2005.

After publishing the initial experimental release, the ABS received feedback from users on these measures. Comments stated that they provided a unique insight into inflationary pressures experienced by Australian households. Feedback also acknowledged the subjectivity involved in classifying a good or service as either discretionary or non-discretionary. Overall, there was broad support for producing measures of Non-discretionary and Discretionary inflation.

From the September 2021 quarter, the ABS will be publishing these measures in the regular quarterly CPI release in Table 8. CPI: Analytical Series, Weighted Average of Eight Capital Cities.

Further feedback or questions on the new measures can be sent to prices.statistics@abs.gov.au

The CPI measures price change for goods and services purchased by Australian households in each of the eight capital cities. This measure of inflation informs monetary and fiscal policy and is used widely by economists and the general community to assess the health of the Australian economy.

An area of interest is whether prices are increasing at the same rate for goods and services that could be considered essential (non-discretionary), compared to goods and services that are more discretionary in nature. To inform this, the ABS classified CPI goods and services into two categories: ‘Non-discretionary’ and ‘Discretionary’.

Analysis of these measures indicates that prices of non-discretionary goods and services increased faster than prices for discretionary goods and services. Over the period 2005/06 to December 2020, cumulative Non-discretionary inflation was 44 per cent, whereas cumulative Discretionary inflation was 32 per cent. Excluding the impact of tobacco (which saw prices increase by more than 400 per cent over the period) resulted in lower Discretionary inflation of 18 per cent.

There are no international standards or definitions for non-discretionary and discretionary household spending. Deciding whether a good or service meets a basic need (non-discretionary) is somewhat subjective and will differ across households. To categorise the 87 CPI components as either ‘non-discretionary’ or ‘discretionary,’ the ABS developed the following definitions:

Goods or services which are purchased because they meet a basic need (food, shelter, healthcare), are required to maintain current living arrangements (car maintenance, school fees), or are a legal obligation (compulsory insurance, stamp duty).

Spending on these goods or services may be less responsive when there are changes in household wealth and incomes, or changes in relative prices.

Goods or services which could be considered ‘optional’ purchases, such as take away meals, alcohol and holidays.

Spending on these goods and services may be more responsive to changes in household wealth and incomes, or changes in relative prices.

Goods and services were classified in line with the above definitions. Table 1 shows the allocation of the expenditure weight for each CPI group to the Non-discretionary and Discretionary categories. A list of the 87 CPI components classified as either Non-discretionary or Discretionary is provided in the appendix.

Between 2005 and 2020 Non-discretionary inflation exceeded overall CPI inflation. Price increases in housing, health and education were the main contributors. Figure 2 shows a fall and subsequent rise in Non-discretionary inflation in 2020. This was the result of the introduction of free child care in the June quarter and removal in the September quarter, as well as volatility in automotive fuel prices.

Figure 2 also shows that from 2005 Discretionary inflation rose more slowly than overall CPI inflation. Price falls for goods such as clothing, furniture, household appliances and motor vehicles were the main reason, while price increases for discretionary food has been subdued in recent years. 

Tobacco was the biggest contributor to Discretionary inflation, with prices increasing more than 400 per cent since 2005 following annual increases in the tobacco excise. Excluding tobacco reduces Discretionary inflation over the period 2005 to 2020 from 32 per cent to 18 per cent. With ABS data showing that fewer than 15 per cent of Australians are daily smokers, removing the impact of tobacco price increases from Discretionary inflation makes it more representative of the majority of the population.

Figure 3 shows the annual percentage change since 2006. Over this period Non-discretionary inflation increased at an average annual rate of 2.43 per cent compared to 1.80 per cent for Discretionary inflation and 1.07 per cent when excluding tobacco. However, for the past two years, Non-discretionary inflation was lower than Discretionary inflation, due in part to lower housing costs and automotive fuel prices.

It is also noticeable that Discretionary inflation is typically more stable than Non-discretionary inflation, which has several peaks and troughs. Non-discretionary inflation includes automotive fuel and food, which can have significant price rises and falls, and is more likely to be impacted by infrequent price changes, such as for utilities, education and public transport.

Table 2 compares the CPI weights between 2005 and 2019, as well as the amount of inflation over this period. Changes in expenditure reflect both changes in spending patterns (what and how much households purchase), as well as changes in the relative cost of goods and services.

Table 2 shows that spending on Non-discretionary goods and services increased as a proportion of total spending, from 56.7 per cent to 59.3 per cent. This was predominantly due to an increase in spending on Housing and Education, which saw inflation over this period of over 60 and 80 per cent. Spending for Discretionary goods and services decreased as a proportion of total spending, from 43.3 per cent to 40.7 per cent. This is partly a result of lower inflation, or in some cases, deflation for goods such as clothing and footwear and household appliances.