Annual weight update of the CPI and Living Cost Indexes

This article presents an overview of the 2022 annual re-weight of the Consumer Price Index (CPI) and Selected Living Cost Indexes (SLCIs). The new weights were implemented in October for the monthly CPI indicator (released 30 November 2022) and will apply from the December quarter 2022 for the quarterly CPI and SLCIs. The December quarter CPI will be released on 25 January 2023 and the SLCIs will be released on 1 February 2023.

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 change in spending patterns, which have continued to evolve over the past two years. 

An example of the change can be seen in the 12 months to June quarter 2022, where spending increased by 112% for Transport services and 20% for Hotels, cafes and restaurants. Over the same period, total spending increased by 9.6%.

The weight reference period refers to the period for which expenditure data is used to update the CPI weights. Prior to 2020, the weight reference period was typically lagged by 18 months when updating the CPI weights. Under this approach it would have meant using expenditure data from the 2020-21 financial year for the 2022 update. Spending patterns in 2020-21 were considered unrepresentative for the purpose of re-weighting the CPI because they were impacted by lockdowns in various states and territories and international border closures. Therefore, expenditure data from the 2021-22 financial year has been used for the 2022 weight update.

The main data source to update the 2022 CPI and SLCI weights is 2021-22 HFCE data. Other data sources such as supermarket scanner data and Retail Trade data provide a more detailed breakdown compared to the HFCE data. These data sources are used to split the aggregate HFCE total value to update the lower level weights in the CPI. For example, the scanner data is used to split the HFCE value for Food into categories such as meat and dairy.

Overseas Arrivals and Departures (OAD) data was used to derive the CPI weight for International holiday travel. OAD data from the period July to September 2022 was used as it was considered representative of current and future holiday travel. This showed that the number of people travelling has returned to around 55% of pre-COVID (2019) levels. With the use of OAD data, expenditure on international travel was derived as 55% of the 2019 HFCE level.

As with previous years, 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 2022 update, 12-month movements in the HFCE data from the financial year 2020-21 to 2021-22 were used. The approach for the 2022 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 2020-21 to 2021-2022 for the HFCE data from step 2, and apply these movements to each CPI EC to update the expenditure values.
4. Price update the 2021-22 expenditure values for each CPI EC to the September 2022 quarter.
5. Re-scale the price updated expenditure values across all CPI ECs so they sum to 100 (i.e. expenditure shares).

The CPI weights reflect the relative amount spent on goods and services as a proportion of total expenditure by all households. SLCIs similarly reflect expenditure by the different sub-groups of the household population represented by each index. The weights do not represent the expenditure of an 'average household'. The CPI weights for the CPI groups are shown in table 1.

One thing to note when comparing the weights between 2021 and 2022 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. This is particularly notable for the 2022 re-weight due to the large increase in the expenditure share for the Recreation and culture group, due predominantly to the increase in weight for International holiday travel.  

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, reflecting that the EC now represents a greater proportion of total expenditure than it did previously. 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 2022 CPI weight update, the largest weight remains for the Housing group (22.24%), followed by Food and non-alcoholic beverages (17.18%), Transport (10.99%) and Recreation and culture (10.84%).

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 weight for the Food and non-alcoholic beverages group increased by 0.42 percentage points (pp) due to higher spending at restaurants and cafes following the lifting of COVID-19 restrictions. This resulted in the weight for Restaurant meals increasing by 0.54pp to 3.96%. The weight for Takeaway meals fell by 0.08pp reflecting household spending shifting from eating at home to restaurant dining. Most of the other food ECs saw small falls in their weights as spending increased by less than total spending.

The weight for the Alcohol and tobacco group fell 1.14pp. The fall is largely due to a decrease in the weight for Tobacco (-0.81pp). Over the past 12 months purchases of cigarettes fell as smoking rates continued to decline and cigarette prices rose by less than other goods and service.

The weight for the Housing group fell 1.00pp due to Rents (-0.48pp) and Electricity (-0.30pp). The weight for Rents fell due to the increase in expenditure being less than the increase in total expenditure. Over this period there was a relatively small increase in both the number of dwellings rented and rent prices. The weight for Electricity fell due to lower electricity consumption and the introduction of rebates in some states and territories having a temporary impact on prices.

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 Transport group increased by 0.41pp due largely to a 0.33pp increase in the weight for Automotive fuel to 3.61%. Higher petrol prices and a rise in fuel consumption as COVID-19 restrictions were removed saw spending on automotive fuel increase.

The weight for the Recreation and culture group increased 2.20pp due to the weight of International holiday travel increasing 1.77pp. The outbreak of COVID-19 and the shutting of international borders resulted in expenditure falling to near zero for International holiday travel. This saw the weight for International holiday travel in the CPI fall from 3.5% in 2019 to 0.1% in 2020 and 2021. With the re-opening of borders in late 2021, Overseas Arrivals and Departures (OAD) data show that the number of people travelling has returned to around 55% of pre-COVID (2019) levels. This has resulted in the International holiday travel weight increasing to 1.85% in the CPI.

31/05/2024 - The Consumer Price Index – 2022 weighting pattern spreadsheet has been updated to account for some adjustments made to city breakdowns. This change is only to update the table in this publication, it has not changed any historical weights used in compiling the CPI.