6470.0.55.002 - Information Paper: Introduction of the Consumer Price Index Weight Update, 2018  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 12/12/2018  First Issue
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2.1 The most recent Household Expenditure Survey (HES) was conducted in 2015-16 and provided information on the spending patterns of Australian households for the CPI 17th series, which was implemented in the December quarter 2017. When it’s available, the HES remains the primary data source for the CPI and SLCI weights. Following the 17th series review, data from the National Accounts will be the used to update the CPI and SLCIs weights until data from the next HES is available in 2021-22.

2.2 The main data source for the 2018 CPI and SLCI weight update is Household Final Consumption Expenditure (HFCE) data from the National Accounts. Conceptually, the measurement of HFCE closely aligns with the HES. HFCE data captures household expenditure by Australian households only and excludes expenditure by non-residents in Australia.

2.3 HES is a significant data source for both the CPI and HFCE. In compiling HFCE data, additional data from sources such as the Retail and Wholesale Industries (cat. no. 8622.0) and the Economic Activity Survey are incorporated to produce an annually updated series.

2.4 While HFCE is the main data source for updating the CPI for the inter-HES years, weights for some of the components of the CPI and SLCIs are derived from alternative data sources. These components are:

      • New dwelling purchase by owner-occupiers
      • Other financial services
      • Mortgage interest charges (only included in the SLCIs)

2.5 For more information on the data sources used for these components see the information papers: Introduction of the 17th Series Australian Consumer Price Index and An Update on the Annual Re-weighting of the Australian CPI and Living Cost Indexes.


2.6 The use of HFCE data to re-weight the CPI has many benefits for inflation measurement. The primary benefit is that more up-to-date weights enhance the CPI in its principal purpose as a macro-economic indicator of household inflation. However, there are challenges with using HFCE data for CPI weighting purposes. These challenges were investigated by the ABS and detailed in the information paper Increasing the Frequency of CPI Expenditure Class Weight Updates.

2.7 As part of earlier investigations by the ABS, an empirical assessment was also conducted (see ABS, 2016). Experimental price indexes using weights derived from HFCE data were produced between 2005 and 2015 to compare the annually re-weighted series with the existing CPI series. The results revealed that the experimental HFCE series reported lower average annual household inflation measures relative to the CPI. This supported the theory that higher frequency (annual) re-weighting at the CPI EC level captures a greater amount of consumer substitution when compared to the current CPI (six yearly) re-weighting process.

2.8 For the 2018 update, movements in the HFCE data for the years 2015-2016 to 2016-2017 have been applied to the 17th series (2017) weights, which were primarily derived from the HES. The approach for the 2018 update to re-weight the CPI and SLCIs can be summarised as follows:

    1. Align the HFCE data with the scope and classifications of the CPI and SLCIs at a detailed product level. This requires the removal of some components of HFCE (e.g. expenditure by Non Profit Institutions Serving Households).
    2. Produce a concordance of the HFCE data to the Consumer Price Index Commodity Classification (CPICC). This provides HFCE data for each CPI expenditure class (EC) for the CPI and SLCIs. These first two steps result in HFCE data that has been aligned to the same concepts and scope of the CPI and SLCIs.
    3. Calculate movements from 2015-16 to 2016-17 for the ‘HFCE aligned’ data from step (ii), and apply these movements to each CPI EC to update the expenditure values.
    4. Price update the 2016-17 expenditure values for each CPI EC to the September quarter 2018.
    5. Re-scale the price updated expenditure values across all CPI ECs so they sum to 100.0 (i.e. expenditure shares).