6461.0 - Consumer Price Index: Concepts, Sources and Methods, 2009
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 17/12/2009
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CHAPTER 13 OUTPUTS AND DISSEMINATION
13.3 These papers describe the review process, the issues considered, the review outcomes, and the re-weighting process, and outline the changes from the previous series. 13.4 The 14th series of the CPI was introduced in the September quarter 2000, after a minor review completed early in 2000. The changes introduced in the 14th series were considered necessary to address issues arising from the introduction of The New Tax System (TNTS) on 1 July 2000. As part of the review process the ABS published Information Papers describing the changes:
13.5 The 15th series CPI introduced in September quarter 2005 was also a minor review. The item weights were revised in line with expenditure patterns identified in the 2003-04 Household Expenditure Survey (HES), and a new subgroup called Financial services was introduced into the index. Once again, ABS published an Information Paper describing the changes:
PUBLISHED STATISTICS 13.6 The CPI is compiled quarterly by the ABS for quarters ending on 31 March, 30 June, 30 September, and 31 December each year. The data are typically released on the fourth Wednesday after the end of the reference quarter, depending on public holidays, but no later than the last Wednesday of the month after the end of the reference quarter, in the publication Consumer Price Index, Australia (cat. no. 6401.0). 13.7 The statistics are published in several different ways. Although they are available as printed publications, the main mechanism for dissemination of ABS data is through the ABS web site www.abs.gov.au. The web site provides free of charge:
Quarterly and annual data 13.8 The CPI is published for both quarters and financial years. The index number for a financial year is the simple arithmetic average (mean) of the index numbers for the four quarters of that year. Index numbers for calendar years are not published by the ABS, but can be calculated as the simple arithmetic average of the quarterly index numbers for the year concerned. Equitable access 13.9 The statistics are made available simultaneously to all interested parties through these releases. To ensure equitable access to the data, all statistics are embargoed until 11.30 a.m. (Canberra time) on the day of release, and before then no information about the price indexes is publicly available. 13.10 The 11.30 a.m. embargo and simultaneous access to the statistics applies to both the electronic and hardcopy releases. Revisions 13.11 The ABS strives for accuracy in all of its publications. The accuracy of the CPI is of particular importance to the ABS, and in recognition of the use of the CPI in determining economic policy and in contract price indexation, the ABS makes an effort to eliminate the need for revision. However, if revision is required, the ABS's revisions policy is based on the Resolution on Consumer Price Indices issued by the International Labour Organization in 2003: "When it is found that published index estimates have been seriously distorted because of errors or mistakes made in their compilation, corrections should be made and published. Such corrections should be made as soon as possible after detection according to publicly available policy for correction. Where the CPI is widely used for adjustment purposes for wages and contracts, retrospective revisions should be avoided to the extent possible." INTERPRETING INDEX NUMBERS Index points and percentage changes 13.12 Movements in indexes from one period to any other period can be expressed either as changes in index points or as percentage changes. The following example illustrates these calculations for the All groups CPI (weighted average of the eight capital cities) between September quarter 2007 and the September quarter 2008. The same procedure is applicable for any two periods.
September quarter 2008 166.5 less September quarter 2007 158.6 equals change in index points 7.9 Percentage change 7.9 / 158.6 x 100 = 5.0% 13.13 For most applications, movements in price indexes are best calculated and presented as percentage changes. Percentage change allows comparisons in movements that are independent of the level of the index. For example, a change of 2.0 index points when the index number is 120.0 is equivalent to a change of 1.7 per cent. But if the index number were 80.0, a change of 2.0 index points would be equivalent to a change of 2.5 per cent, a significantly different rate of price change. Only when evaluating change from the base period of the index will the points change be numerically identical to the percentage change. 13.14 The percentage change between any two periods must be calculated, as in the example above, by direct reference to the index numbers for the two periods. Adding the individual quarterly percentage changes will not result in the correct measure of longer term percentage change. That is, the percentage change between (say) the June quarter of one year and the June quarter of the following year will not necessarily equal the sum of the four quarterly percentage changes. The error becomes more noticeable the longer the period covered, and the greater the rate of change in the index. This can readily be verified by starting with an index of 100.0 and increasing it by 10 per cent (multiplying by 1.1) each period. After four periods, the index will equal 146.4 delivering an annual percentage change of 46.4 per cent, not the 40.0 per cent obtained by adding the four quarterly changes of 10.0 per cent. 13.15 Although the CPI is compiled and published as a series of quarterly index numbers, its use is not restricted to the measurement of price change between quarters. A quarterly index number can be interpreted as representing the average price during the quarter (relative to the base period), and index numbers for periods spanning more than one quarter can be calculated as the simple (arithmetic) average of the quarterly indexes. For example, an index number for the calendar year 2004 is the arithmetic average of the index numbers for the March, June, September and December quarters of 2004. 13.16 This characteristic of index numbers is particularly useful. It allows average prices in one year to be compared with those in any other year. It also enables prices in (say) the current quarter to be compared with the average prices prevailing in a previous year. 13.17 The quarterly change in the All groups CPI represents the weighted average price change of all the items included in the CPI. Publication of index numbers and percentage changes for components of the CPI are useful in their own right. However, these data are often not sufficient to enable important contributors to total price change to be reliably identified. What is required is some measure that encapsulates both an item’s price change and its relative importance in the index. 13.18 If the All groups index number is thought of as being derived as the weighted average of the indexes for all its components, then in concept the index number for a component multiplied by its weight to the All groups index results in what is called its points contribution. This relationship only applies if all the components have the same reference base, and there has been no linking of component series since the base period. However, the Australian CPI has been linked several times since its reference base (1989-90), and therefore a more practical method for calculating points contribution is used. 13.19 The published points contributions are calculated using the expenditure aggregates. In any period, the points contribution of a component to the All groups index number is calculated by multiplying the All groups index number for the period by the expenditure aggregate for the component in that period, and dividing by the All groups expenditure aggregate for that period. Calculating points contribution using published data may give a different result to the points contribution derived using expenditure aggregates. Also, building up from the individual products' points contribution may give a different result from taking the All groups index number and subtracting the points contribution for those products. The reasons for these differences are the different levels of precision used in the calculations. 13.20 The change in a component item’s points contribution from one period to the next provides a direct measure of the contribution to the change in the All groups index resulting from the change in that component's price. In addition, information on points contribution, and points contribution change, is of immense value when analysing sources of price change, and for answering what-if type questions. Consider the following data extracted from the September quarter 2005 CPI publication.
13.21 Using only the index numbers themselves, the most that can be said is that between the June and September quarters 2005, the price of automotive fuel increased by more than the overall CPI (by 11.6% compared with an increase in the All groups of 0.9%). The additional information on points contribution and points change can be used to make further analyses.
13.22 The following questions and answers illustrate the uses that can be made of the CPI. Question 1:
Response 1:
The answer is then given by: $200 x 149.8 / 128.4 = $233.33 Question 2:
Response 2:
13.23 To illustrate this, consider a simple example of expenditure on oranges in two periods. The product of the quantity and the price gives the expenditure in a period. Suppose that in the first period ten oranges were purchased at a price of $1.00 each, and in the second period fifteen oranges were purchased at a price of $1.50 each. Expenditure in period 1 would be $10.00 and in period 2 $22.50. Expenditure has increased by 125 per cent, yet the volume (i.e. the number of oranges) has only increased by 50 per cent with the difference being accounted for by a price increase of 50 per cent. In this example all the price and quantity data are known, so volumes can be compared directly. Similarly, if prices and expenditures are known, quantities can be derived. 13.24 However what if the actual prices and quantities are not known?. If expenditures are known, and a price index for oranges is available, the index numbers for the two periods can be used as if they were prices to adjust the expenditure for one period to remove the effect of the price change. If the price index for oranges was equal to 100.0 in the first period, the index for the second period would equal 150.0. Dividing expenditure in the second period by the index number for the second period, and multiplying this result by the index number for the first period provides an estimate of the expenditure that would have been observed in the second period had the prices remained as they were in the first period. This can easily be demonstrated using the oranges example:
13.25 So, without ever knowing the actual volumes (quantities) in the two periods, the adjusted second period expenditure ($15.00), can be compared with the expenditure in the first period ($10.00) to derive a measure of the proportional change in volumes: $15/$10 = 1.50, which equals the ratio obtained directly from the comparison of the known volumes. 13.26 We now return to the question about expenditure on motor vehicles recorded in the HES in 1998-99 and 2003-04. As the HES data relate to the average expenditure of Australian households, the ideal price index would be one that covers the retail prices of motor vehicles for Australia as a whole. The price index that comes closest to meeting this ideal is the index for the Motor vehicles expenditure class of the CPI for the weighted average of the eight capital cities. The Motor vehicles index number for 1998-99 is 105.9 and for 2003-04 it is 103.1. Using these index numbers, recorded expenditure in 2003-04 ($49.47) can be adjusted to 1998-99 prices as follows: $49.47 x 105.9 / 103.1 = $50.81. 13.27 The adjusted 2003-04 expenditure of $50.81 can then be compared to the expenditure recorded in 1998-99 ($42.64) to deliver an estimate of the change in volumes. This indicates a volume increase of 19.2%. Constructing special index series 13.28 Although the ABS produces a wide range of indexes from the CPI, there may be occasions when none of these exactly suit a user’s special requirement. In this case the user may wish to construct their own index based on component indexes of the CPI. For example, suppose a researcher is interested in how petrol prices moved relative to the price of all other consumer goods and services since 1987. As the All groups CPI includes Automotive fuel, it is not the ideal measure for comparative purposes, so the researcher wishes to compile an All groups CPI excluding the Automotive fuel index. 13.29 The index can be compiled directly by using index points contributions (see examples above), and then indexing the points contributions to 1989-90=100.0. However, index points contributions are not typically published or available as a historical series, so it is necessary to work with the published index numbers. In addition, for CPI components that have a small weight, the use of index numbers can be more precise. 13.30 In constructing a series of this type, allowance should be made for the change in weights with each CPI series. Relevant data and weights from the CPI series are shown in Table 13.2.
13.31 Now since the CPI is a fixed weighted index, where I is index, W is weight (expressed as a proportion) and in the subscripts Ag is All groups, Af is Automotive fuel. Noting 13.32 When the 11th series CPI was introduced in the December quarter 1986, Automotive fuel had a weight of 4.79 per cent and an index of 90.4, and the All groups CPI was 79.8. Thus the index for All groups excluding Automotive fuel is calculated as 79.3 for that quarter. The fuel weight is held at 4.79 per cent until the June quarter 1992 when the 12th series CPI was introduced. The All groups excluding Automotive fuel index is calculated for the June quarter 1992 using both 11th series and 12th series CPI weights. This allows calculation of a link factor given by: Link factor = (Index calculated using 11th series weight) / (Index calculated using 12th series weight) 13.33 The link factor is then applied to the index numbers calculated using the 12th series weights. In this case the link factor is 1.0. However, depending on the series being constructed, this may not always be so. Precision and rounding 13.34 To ensure consistency from one publication to the next, the ABS uses a set of rounding conventions or rules for calculating and presenting the results. These conventions strike a balance between maximising the usefulness of the information for analytical purposes, and retaining a sense of the underlying precision of the estimates. Users need to consider these conventions when using the CPI for analytical or other special purposes. 13.35 Index numbers are always published relative to a base of 100.0. Index numbers and percentage changes are always published to one decimal place, and the percentage changes are calculated from the rounded index numbers. Index numbers for periods longer than a single quarter (e.g. for financial years) are calculated as the simple arithmetic average of the rounded quarterly index numbers. 13.36 Points contributions are published to two decimal places. Change in points contributions is calculated from the rounded points contributions. Rounding differences can arise in the points contributions where different levels of precision are used. Document Selection These documents will be presented in a new window.
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