Annual weight update of the CPI and Living Cost Indexes

This presents the 2021 annual re-weight of the Consumer Price Index (CPI) and Selected Living Cost Indexes (SLCIs). The 2021 re-weight will apply from the December 2021 quarter. The CPI will be released on 25 January 2022 and the SLCIs will be released on 2 February 2022.

The ABS has annually re-weighted the CPI and SLCIs since 2018, predominantly using Household Final Consumption Expenditure (HFCE) data. Annually re-weighting the CPI ensures that the CPI basket continues to be representative of spending by Australian households. Further details on annually re-weighting the CPI can be found in the information paper An Implementation Plan to Annually Re-weight the Australian CPI, 2017. 

This article provides an overview of the data sources and methods used to update the CPI and SLCI weights and presents the updated weighting patterns.

For further information contact prices.statistics@abs.gov.au

Typically, household spending patterns change gradually. Chart 1 shows that since the outbreak of the COVID-19 pandemic there was a sudden, and now sustained shift in spending patterns. 

An example of the change in spending is the shift away from spending on services towards higher spending on goods. This is reflected in the 2021 CPI weight update, with the weight for goods increasing to 58% of the CPI, compared to 53% of the CPI in 2019.

The weight reference period refers to the period for which expenditure data is used to update the CPI weights. In response to the shift in spending, the weight reference period for the 2021 annual CPI re-weight is the most recent financial year of 2020-21. This is a change from previous annual weight updates where the weight reference period was typically lagged by 18 months. 

Under the previous approach this would have meant using expenditure data from the 2019-20 financial year for the 2021 update. Spending patterns in 2019-20 were considered unrepresentative for the purpose of re-weighting the CPI because they were impacted by the national lockdown and related events such as panic buying in supermarkets. Therefore, expenditure data from the 2020-21 financial year has been used for the 2021 weight update. 

The ABS will continue to monitor HFCE and other data sources throughout 2022 to ensure that the CPI weights are reflective of spending patterns by Australian households.

The main data source to update the 2021 CPI and SLCI weights is 2020-21 HFCE data. Other data sources such as supermarket scanner data and Retail Trade data provide a more detailed breakdown compared to the HFCE data. Where this is the case, such as for food, these data sources are used to split the aggregate HFCE data to update the weights in the CPI.

A new data source was used for the 2021 update to the weight for Child-care. Administrative data from the Department of Education, Skills and Employment replaced the ABS's 2015-16 Household Expenditure Survey data. The 2021 weight for Child-care of 0.91% compares to the 2019 (pre-COVID-19) weight of 1.17%.

Updated 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; and
• Mortgage interest charges (only included in the SLCIs).

For more information on the data sources used 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.

The use of HFCE data for CPI weights provides more up-to-date-weights than under previous methods, enhancing 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.

For the 2021 update, movements in the HFCE data for the financial years 2019-20 to 2020-2021 were used. The approach for the 2021 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 (NPISH)).
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 aligned to the same concepts and scope of the CPI and SLCIs.
3. Calculate movements from 2019-20 to 2020-2021 for the HFCE data from step 2, and apply these movements to each CPI EC to update the expenditure values.
4. Price update the 2020-2021 expenditure values for each CPI EC to the September 2021 quarter.
5. Re-scale the price updated expenditure values across all CPI ECs so they sum to 100 (i.e. expenditure shares).

The CPI and SLCI weights reflect the relative expenditures of the CPI population group and SLCI population subgroups as a whole. The weights reflect average expenditure of households and not the expenditure of an 'average household'. The CPI weights for the CPI groups are shown in chart 2.  

One thing to note when comparing the weights between 2020 and 2021 is that the weights are relative. The weight of a component of the CPI depends on how expenditure on that component compares to total expenditure (i.e. expenditure shares), rather than the absolute change in expenditure.

For example, if the increase in expenditure for a particular expenditure class (EC) is greater than the increase in total expenditure (in percentage terms), the weight for that EC will increase. Conversely, if the increase in expenditure for a particular EC is less than the increase in total expenditure, the weight for that EC will decrease.

For the 2021 CPI weight update, the largest weight remains for the Housing group (23.24%), followed by Food and non-alcoholic beverages (16.76%) and Transport (10.58%).

Changes in the CPI weights are discussed in more detail below. All analysis refers to the weighted average of the eight capital cities. 

A more detailed breakdown of the CPI weights is available in appendix 1.

The Food and non-alcoholic beverages group (-0.59 percentage points (pp)) saw small falls in weights across most supermarket food categories. Last year’s higher weight was influenced by increased spending on food at supermarkets during the initial stages of the COVID-19 outbreak, which saw food stockpiling and more people eating home-cooked meals. The weight for Takeaway meals (+0.10pp) increased slightly, while the weight for Restaurant meals (-0.05pp) decreased slightly, which reflects the shift away from restaurant dining to eating at home.

The fall in the weight for the Housing group (-0.81pp) is due to Rents (-0.57pp), which reflects increased vacancy rates and lower rental prices in Sydney and Melbourne. There has also been a shift towards owner-occupied housing with the weight for New dwellings increasing 0.18pp. The weight for Electricity (-0.28pp) fell due to lower prices in a number of capital cities.

Changes in Housing group weights differed across the capital cities. Appendix 2 provides a comparison of the Housing group weights for each capital city.

The weight for the Furnishings, household equipment and services group (+0.40pp) increased due to strong demand for household goods, particularly Furniture (+0.25pp). The weight for Child-care of 0.91% is lower than the 2019 (pre-COVID) weight of 1.17%. The updated weight replaces previous estimates based on the 2015-16 Household Expenditure Survey data with more up-to-date administrative data from the Department of Education, Skills and Employment.

The weight for the Transport group (+0.39pp) increased due to a higher number of vehicles sold combined with higher prices, which increased the weight for Motor vehicles (+0.61pp). Higher fuel prices increased the weight for Automotive fuel (+0.12pp).

The Insurance and financial services (+0.67) saw an increase in its weight due to higher real estate activity, which increased the weight for taxes on transfers (stamp duty). This is reflected in an increase in the weight for Other financial services (+0.69pp).

22/12/2021 - following the release on 17/12/2021, there has been an update to the points contribution values in table 4 of the Data Downloads spreadsheet 'Consumer Price Index - 2021 Weighting Pattern'. No other data has been affected.