# The system of price statistics

Latest release
Consumer Price Index: Concepts, Sources and Methods
Reference period
2018

## Introduction

14.1 The system of price statistics outlines the system of price statistics in Australia and assists users to select the most appropriate price measures for particular applications. This includes for the analysis of inflation, indexation and business contract adjustment.

14.2 The Consumer Price Index (CPI) is part of a broader system of price statistics. There are a range of other price indexes that apply to different sectors of the economy. The system of price statistics describes the other price measures produced by the ABS, both the direct measures of price change, and derived measures.

## Principal price indexes

14.3 The principal indexes in the Australian system of prices statistics are:

(i) Consumer Price Index (CPI);
(ii) Producer Price Indexes (PPI);
(iii) International Trade Price Indexes (ITPI);
(iv) Residential Property Price Indexes (RPPI); and
(v) Wage Price Index (WPI).

14.4 These are well known and closely watched indicators of macroeconomic performance and the purchasing power of money, and they are used as deflators in providing summary measures of the volume of goods and services produced and consumed. These indexes are not only important tools in the design and conduct of the monetary and fiscal policy of the government, but also are of great utility in economic analysis and decision making throughout the private sector. These price indexes provide an integrated and consistent view of price developments in production, consumption, and international transactions in goods and services.

## Direct measures of price change

14.5 All the principal price indexes introduced above are direct measures of price change; that is, they are obtained through collecting and directly using price data. Each of the indexes is described in the following paragraphs.

14.6 Consumer Price Index (CPI) is a measure of household inflation. This is achieved by measuring quarterly changes in the price of goods and services which account for a high proportion of expenditure by Australian metropolitan households.

14.7 Producer Price Indexes (PPIs) measure the changes in the prices of goods and services as they either leave the place of production or enter the production process. PPIs can be constructed as either an output measure or an input measure. Input PPIs measure the rate of change in the prices of goods and services purchased by the producer. Output PPIs measure the rate of change in the prices of goods and services as they leave the producer.

14.8 The ABS compiles a suite of quarterly input and output price indexes for selected industries of the Australian economy. These measures show both the changes in the prices that producers receive for their outputs, as well as the changes in the prices that producers pay for their inputs. Broad based indexes are also produced that cover significant parts of the economy, in particular, the Stage of Production price indexes cover the measured economy for each of the three stages of production (preliminary, intermediate, and final demand). The following indexes are the major PPIs released by the ABS:

• Stage of Production (SOP) Producer Price Indexes - presented by stage of production, industry of origin and destination within the economy;
• Input to the Coal Mining Industry;
• Output of the Manufacturing industries;
• Input to the Manufacturing industries;
• Output of the Construction industries;
• Input to the House construction industry;
• Output of the Accommodation and food services industries;
• Output of the Transport, postal and warehousing industries;
• Output of the Information media and telecommunications industries;
• Output of the Rental, hiring and real estate services industries;
• Output of the Professional, scientific and technical services industries;
• Output of the Administrative and support services industries;
• Output of the Public administration and safety industries;
• Output of the Other services industries;
• Output of the Education and training industries;
• Output of the Health care and social assistance industries;
• Output of the Mining industries;
• Output of the Retail Trade Industry (experimental series).

14.9 The PPIs are published quarterly in Producer Prices Indexes, Australia (cat. no. 6427.0).

14.10 Import Price Index (IPI) measures the changes in the prices paid for imported products that are landed in Australia each quarter.

14.11 Export Price Index (EPI) measures the changes in the prices received for exported products from Australia each quarter.

14.12 The IPI and EPI are published quarterly in International Trade Price Indexes, Australia (cat. no. 6457.0).

14.13 Residential Property Price Indexes (RPPIs) measure changes in residential property prices in each of the eight capital cities. The ABS has compiled a House Price Index (HPI) since 1986. A review was completed in 2012 which resulted in the expansion in scope beyond the existing HPI to include attached dwellings and produce an aggregate RPPI. The suite of Residential Property Price Indexes is:

• A Residential Property Price Index (RPPI);
• An Established House Price Index (HPI); and
• An Attached Dwellings Price Index (ADPI).

14.14 The RPPIs are published quarterly in Residential Property Price Indexes, Eight Capital Cities (cat. no. 6416.0).

14.15 Wage Price Index (WPI) measures the changes in wages and salaries paid by employers for a unit of labour (i.e. one hour) over time that arise from market factors. The WPI is designed to measure inflationary pressures associated with the Compensation of Employees (CoE), as outlined by the System of National Accounts (2008). Theoretically, the WPI would include all elements of CoE, but for practical reasons it focuses on wages and salaries payments in cash, as well as salary sacrifice payments.

14.16 The WPI has the dual purpose of monitoring wages and salaries inflation in the economy and supporting the compilation of the Australian System of National Accounts. To achieve this, the WPI uses a Laspeyres index methodology (where the price in a particular period is compared to that in a previous fixed period) designed to produce a measure of pure price change in wages and salaries independent of compositional factors (i.e. the quantity and quality of labour are held constant).

14.17 The WPI is published quarterly in Wage Price Index, Australia (cat. no. 6345.0).

## Derived measures of price change

### National accounts price indexes

14.18 The Australian System of National Accounts, produced by the ABS, is a systematic framework of statistics providing a wide range of information about the economy and its components. Within the National Accounts framework are derived measures of price change which include implicit price deflators (IPDs), and chain price indexes.

14.19 IPDs are obtained by dividing a current price value by the chain volume measure expressed in dollar terms. IPDs are derived measures (hence the term implicit) and are not normally the direct measures of price change by which current price estimates are converted to volume measures. They reflect both changes in the prices between the two periods and changes in the composition of the aggregate between those periods.

14.20 Because the composition of an aggregate often changes from period to period, IPDs do not compare the price of a constant basket of goods and services between any two periods (except in comparing the index reference period with any other period). IPDs calculated from quarterly aggregates may be particularly affected by changes in the physical composition of those aggregates. As much of the quarter to quarter change in the physical composition is of a seasonal nature, IPDs derived from seasonally adjusted data are normally more reliable measures of price change than those calculated from unadjusted data. Even so, seasonally adjusting the series may not completely eliminate the effect of seasonal changes on the derived IPDs.

14.21 IPDs are available for gross domestic product; exports of goods and services; imports of goods and services; and domestic final demand, and its four major components. They are published quarterly as part of Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0), and Balance of Payments and International Investment Position, Australia (cat. no. 5302.0).

14.22 In those cases where quantity revaluation is used to derive volume estimates, the IPD is used in constructing the chain price indexes. These IPDs are calculated at such a detailed level that for all intents, the published National Accounts chain price indexes can be considered as measures of pure price change. They are annually re-weighted chain Laspeyres price indexes. These indexes encompass the whole of the economy. The chain price index most akin to the CPI is the index for Household Final Consumption Expenditure (HFCE). The main differences between the two are that the chain price index for HFCE is re-weighted annually, and is broader in scope encompassing expenditure by all resident households and non-profit institutions serving households. For example, HFCE includes an estimate of expenditure on gambling, which is not included in the CPI, and it imputes rental payments for owner occupiers.

14.23 An annually chained price index weights price changes together using the previous year's weights for each quarter of the current year. The chain price indexes are calculated from the deflators used to derive the volume estimates, weighted together in the same way and at the same level of detail as the chain volume estimates. In those cases where quantity revaluation is used to derive volume estimates, the implicit price deflator at a detailed level of disaggregation is used in constructing the chain price indexes to minimise the effect of any compositional change.

## Living cost indexes

14.24 The ABS also produces a set of quarterly living cost indexes to assess the effect of changes in prices on the out-of-pocket living expenses experienced by four different types of Australian households categorised based on the principal source of household income, derived from the latest HES.

14.25 The household types in the scope of these indexes account for over 90% of Australian households. The four household types that have been identified as being appropriate for the construction of these indexes, are:

• employee households - those households whose principal source of income is from wages and salaries;
• age pensioner households - those households whose principal source of income is the age pension or veterans affairs pension;
• other government transfer recipient households - those households whose principal source of income is a government pension or benefit other than the age pension or veterans affairs pension; and
• self-funded retiree households - those households whose principal source of income is superannuation or property income and where the HES defined reference person is ‘retired’ (not in the labour force and over 55 years of age).

14.26 The ABS also publishes the Pensioner and Beneficiary Living Cost Index (PBLCI) as part of the suite of living cost indexes. The scope of the PBLCI is households whose principal source of income is from government pensions and benefits (i.e. age pensioner and other government transfer recipient households).

14.27 A living cost index is conceptually different from a price index as it reflects changes over time in the purchasing power of the after-tax incomes of households. It measures the impact of changes in prices on the out-of-pocket expenses incurred by households to gain access to a fixed basket of consumer goods and services. The CPI, on the other hand, is designed to measure price inflation for the household sector as a whole and is not the conceptually ideal measure for assessing the changes in the purchasing power of the disposable incomes of the households. The living cost indexes produced by the ABS are constructed using the outlays approach as opposed to CPI which has been using the acquisition approach since the September quarter 1998. For more information, refer to Purposes and uses of consumer price indexes of this manual or the publication below.

14.28 Selected Living Cost Indexes are published quarterly in Selected Living Cost Indexes, Australia (cat. no. 6467.0).

## Which price series should I use?

14.29 As described, there are a wide range of price indexes produced by the ABS used for indexation, research and analysis. Although the ABS acknowledges that the various price indexes it publishes are used in indexation clauses, it neither endorses nor discourages such use. The ABS has prepared information for users that sets out a range of issues that should be taken into account by parties considering an indexation clause in a contract using an ABS published price index. This paper Use of Price Indexes in Contracts is available on the ABS website and in appendix 5 of this publication.

14.30 The index or indexes selected will affect the price change recorded and should be chosen carefully to best represent the set of items. A description of what each price index measures is available on the ABS website which will assist in the decision of which index to use. For more information about what data are available, please contact the ABS National Information and Referral Service on 1300 135 070.