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CHAPTER 5 COVERAGE AND CLASSIFICATIONS
5.4 The exclusions and inclusions are discussed more fully below.
Business, savings, and investment-related purchases
5.5 As a general principle, a consumer price index only includes goods and services that are purchased by households for consumption. A consumption good or service is one from which households directly derive utility or satisfaction. Any business-related purchases by households are excluded from the basket, as are those items that have a significant savings or investment component, such as land and capital goods. All types of income are generally excluded as well, except those which directly offset a specific purchase, such as subsidies or trade-ins.
Taxes, levies, concessions, and subsidies
5.6 The prices of consumer goods and services, and the ability of households to purchase those items, are affected by a wide range of taxes, regulatory processes, and assistance measures. The treatment of these under the acquisitions and outlays approaches are similar, but there are differences under a cost-of-use approach.
5.7 As a general principle, the acquisitions and outlays approaches only include taxes and subsidies whenever they are tied to the level of consumption of a specific good or service. Thus any taxes based solely on income will generally be out of scope, whereas the prices of goods and services will be inclusive of indirect taxes and commodity-specific subsidies. In some cases, taxes and governmental charges may not be directly related to the level of consumption of a good or service. However, they may still be included if they are an inescapable cost of other decisions made by households about consumption. For example, local government rates and charges are an inescapable cost of home ownership, and so are included in a CPI.
5.8 A cost-of-use approach is concerned with the true value of goods and services consumed. For example, it will value subsidised items at their full market value. It will also exclude income taxes.
5.9 In concept, both the purchases and sales of secondhand goods should be included in a CPI. The purchases of secondhand goods by households are regarded as positive expenditure, and sales by households as negative expenditure. The exact treatment of secondhand goods will also depend on the nature and extent of transactions with other sectors of the economy. In practice, all transactions involving secondhand goods are assumed to occur within the household sector, with acquisitions and purchases cancelling out to give an effective weight of zero. There is also the difficulty of obtaining ongoing prices to constant quality for secondhand goods. Prices for secondhand goods are not collected for the CPI.
Illegal or undesirable goods and services
5.10 In principle, all purchases of goods and services for household consumption are in scope of a CPI. They include goods or services that are either illegal or may be considered socially or morally undesirable, such as alcohol and tobacco, gambling, prostitution, and so-called recreational drugs. However, decisions regarding the composition of the CPI basket are not based on moral grounds, but rather on practical considerations. In the Australian CPI, gambling is excluded as it is difficult to establish the service or utility that households derive from gambling, and thus to determine an appropriate price measure. Recreational drugs and prostitution are both excluded as it is very difficult and indeed dangerous to obtain estimates of prices and expenditures.
5.11 All price indexes have a geographical dimension such as city, rural area, state, region or country. A further aspect to the geographical coverage that is important for CPI price collection is whether the objective is to measure price changes for:
5.12 If the aim of the index is to measure the prices of items sold in an area then the basket will comprise all consumer goods and services sold in that region to households for final consumption. These sales can be made to households that are residents of that region, or to visitors to the region including overseas visitors.
5.13 On the other hand, if the index is to measure prices of items purchased by residents of a region, then it will comprise all consumer goods and services purchased by those households regardless of where they are purchased. So, in addition to purchases made in that region, it will include any purchases those households make whilst visiting other domestic regions and foreign countries, as well as items they order over the Internet or by post from suppliers outside the region.
5.14 The geographical dimension becomes more important the smaller the region to which the index relates.
5.15 The Australian CPI is compiled separately for each capital city. For general statistical purposes, the equivalent of a national index is the series published as the weighted average of eight capital cities. Each capital city index is compiled from data about acquisitions of goods and services by the resident population of that city, and includes their purchases from local outlets, purchases made in other capital cities and regions of Australia, and overseas purchases.
5.16 By and large, the ABS expects that most of the acquisitions made by capital city households will be from suppliers that are located in the same city. The most obvious exception is holiday accommodation services. Where mail order, phone, and Internet purchases are known to be significant (as with airfares and holiday accommodation), prices are collected from these sources.
5.17 The expenditures or weights applied to the index basket reflect the expenditures of a reference population. Typically the basic unit of this reference population is the household.(footnote 1) The household is an appropriate unit because all members of the household jointly consume or use many items, such as food, motor vehicles, and housing, and it is not practicable to determine an expenditure for each member of a household.
5.18 A CPI can be constructed for all households or for a subset of households (e.g. age pensioners, wage and salary earners, self-funded retirees). Even if the purpose of a CPI requires the broadest possible reference population, some types of households whose consumer expenditures are minimal or atypical may be excluded; for example, those living in institutions such as hospitals, barracks, prisons, and on board ships.
5.19 The reference population for the Australian CPI is private households in the eight capital cities. The eight capital cities are the six state capitals and the territory capitals of Canberra and Darwin. This is referred to as the CPI population group and it represents about two thirds of Australian private households. Ideally, the CPI population group should encompass all Australian households, but this is not feasible because of the substantial additional cost of collecting prices outside the capital cities. However, the ABS did construct a set of spatial price indexes for approximately two hundred Australian cities and towns over the period from 1960 to 1990. (A spatial price index is one that enables price levels to be compared between geographical regions at the same time.) Although these indexes were limited to food prices, the results indicated that in the absence of major structural change (such as the opening or closing of a branch railway line) the relative prices between regions remained fairly constant over time. In other words, although the price levels for the localities included in the study were often quite different from those prevailing in the capital cities, all areas exhibited similar price movements over time.
5.20 In Australia, few people are not part of a private household; that is, do not reside in a private dwelling. These people live in public dwellings such as hotels, boarding houses, prisons, and university residences. Expenditure by people who reside in public dwellings is excluded from the Australian CPI.
5.21 A diagrammatic overview of the structure of the Australian CPI is provided in the figure below. The structure can best be thought of from the top down. At the top is the total expenditure or pool of items purchased by the reference population. This is the All groups index, and it is commonly referred to as the headline rate of inflation. Below this, the index branches into finer and finer commodity groupings until, at the lowest level, there are samples of prices for the individual items (elementary aggregates). Indexes are only published down to expenditure class as this is the level at which the structure and weights are fixed for the life of a CPI series.
5.22 This same structure is used for each of the eight capital cities. A full list of groups, subgroups and expenditure classes is provided in Appendix 2.
5.23 The division of the groups and subgroups into product classes is intended to reflect increasing levels of substitutability of the items consumed by households in response to changes in relative prices. For example, at the group level there are unlikely to be any substitution effects between Food and Transportation in response to changes in their relative prices. However, within the Fats and oils expenditure class it would be expected that households are more likely to substitute between margarine and butter in response to changes in their relative prices.
5.24 The commodity classification used in the Australian CPI is a demand-based classification that broadly aligns with the international standard Classification of Individual Consumption by Purpose (COICOP). This classification is based on the concept of household utility. A significant advantage of using a COICOP-based classification is to align the CPI more closely with the dissection of household final consumption expenditure in the Australian National Accounts.
5.25 The 15th series CPI basket is divided into eleven major groups, each representing a broad set of commodities:
5.26 These groups are divided in turn into thirty-three subgroups, and the subgroups into ninety expenditure classes. Presentation of the CPI in the form of groups and subgroups provides the user with quite a degree of versatility in interpreting the results. Index numbers for individual groups and subgroups can be analysed separately as can their individual effects on the whole index.
HOUSEHOLD EXPENDITURE CLASSIFICATION
5.27 In Chapter 6, which discusses weights and their sources, it can be seen that the ABS's Household Expenditure Survey (HES) is the most important source of CPI weights. The expenditures recorded in the HES were coded by ABS according to the Household Expenditure Classification (HEC). To derive expenditures for the CPI expenditure classes, a concordance was established with the HEC codes at their most detailed ten-digit level. Establishing the concordance involved examining detailed listings of commodities coded to each HEC code. The concordance is available as an Excel spreadsheet in Consumer Price Index: Concordance with Household Expenditure Classification, Australia (cat. no. 6446.0.55.001) on the ABS website.
5.28 The majority of HEC codes could be exclusively allotted to a CPI expenditure class. For example, all of HEC code 0302019902 Smallgoods expenditure is allotted to the CPI expenditure class Other fresh and processed meat. However, there are some HEC codes where a one-to-one correspondence could not be established. There are just over six hundred HECs at the ten-digit level, but only ninety CPI expenditure classes. The reasons why unique concordances could not be established are as follows.
5.29 Where HEC codes were split across CPI expenditure classes, the splits were determined using any industrial or other data available or, as a last resort, subjectively. Mostly the expenditures concerned were small.
1 A household is a group of people who usually reside and eat together. It may comprise one person or many.
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