Non-Discretionary and Discretionary Inflation

Uses CPI data to present experimental measures of Non-Discretionary and Discretionary inflation.

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Introduction

The ABS undertook this work as part of the 2020 graduate program. Analysis was conducted by: Audrey Ardolino, William Croxson, Michael Davies, Fiona Mackie and Katrina Millner.

The Consumer Price Index (CPI) measures price change for goods and services purchased by Australian households in the eight capital cities. It is a measure of inflation that informs monetary and fiscal policy. It is also used widely by economists and the general community to assess the health of the Australian economy.

An area of interest is whether prices are increasing at the same rate for goods and services that could be considered essential (non-discretionary), compared to goods and services that are more discretionary in nature. To inform this, the ABS has classified CPI goods and services into two categories: ‘Non-discretionary’ and ‘Discretionary’.

Analysis indicates that prices of non-discretionary goods and services increased slightly faster than for discretionary goods and services. Over the period 2012 to 2019, cumulative non-discretionary inflation was 14.8 per cent, whereas discretionary inflation was 12.9 per cent. Excluding the impact of tobacco (which more than doubled in price over the period) resulted in lower discretionary inflation of 6.4 per cent. 

The ABS welcomes feedback on these measures. Please contact prices.statistics@abs.gov.au.

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Defining non-discretionary and discretionary

There are no international standards or definitions for non-discretionary and discretionary household spending. Deciding whether a good or service meets a basic need (non-discretionary) is somewhat subjective and will differ across households. In light of this, to categorise the 87 CPI components as either ‘non-discretionary’ or discretionary,’ the ABS has developed the following definitions:

Non-discretionary

Goods or services which are purchased because they meet a basic need (food, shelter, healthcare), are required to maintain current living arrangements (car maintenance, school fees), or are a legal obligation (compulsory insurance, stamp duty).

Spending on these goods or services may be less responsive when there are changes in household wealth and incomes, or changes in the relative prices of goods or services.

Discretionary

Goods or services which could be considered ‘optional’ purchases, such as take away meals, alcohol and holidays.

Spending on these goods and services may be more responsive to changes in household wealth or relative prices.

Classification

Goods and services were classified in line with the above definitions. Table 1 shows the allocation of the expenditure weight for each CPI group to the non-discretionary and discretionary categories. A list of each of the 87 CPI components classified as either non-discretionary or discretionary is provided in the appendix.

Table 1: Weight contribution by CPI group (a)
 CPINon-discretionaryDiscretionary
 Weight %Weight %Weight %
All groups10058.541.7
Food and non-alcoholic beverages16.27.68.6
Alcohol and tobacco8.00.08.0
Clothing and footwear3.20.03.2
Housing22.722.70.0
Furnishings, household equipment and services8.93.85.1
Health5.85.80.0
Transport10.26.93.3
Communication2.42.40.0
Recreation and culture12.40.811.6
Education4.42.81.6
Insurance and financial services5.85.80.0
a.   Weights represent the March 2020 quarter. Values may not sum due to rounding

Key Findings

Between 2011 and the start of 2020 non-discretionary inflation exceeded overall CPI inflation. Price increases in housing, health and education costs were the main contributors to non-discretionary inflation. Figure 2 shows a fall and subsequent rise in non-discretionary inflation in 2020. This was the result of free child care being introduced in the June quarter and removed in the September quarter, as well as volatility in automotive fuel prices.

Figure 2 also shows that from 2011 discretionary inflation rose more slowly than overall CPI inflation. Price falls for goods such as clothing, furniture, household appliances and motor vehicles were the main reason, while price increases for discretionary food has also been subdued in recent years.

Tobacco was the biggest contributor to discretionary inflation, with prices more than doubling since 2011 following annual increases in the tobacco excise. Removing tobacco reduces cumulative discretionary inflation since 2011-12 from 16 per cent to 8 per cent. With ABS data showing that fewer than 15 per cent of Australians are daily smokers, removing the impact of tobacco price increases from discretionary inflation makes it more representative of the majority of the population.

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The rate of non-discretionary inflation has been more than double that of discretionary inflation (excluding tobacco) over the period analysed. This analysis shows how prices for goods and services which could be considered ‘essential’ were increasing more rapidly than those for more ‘optional’ goods and services. This provides valuable insights into how Australian households have experienced inflation in recent times.

The ABS is seeking feedback on the usefulness of these measures of discretionary and non-discretionary inflation and the potential to continue to produce them in the future. Feedback can be sent to prices.statistics@abs.gov.au.

Appendix

Classification of Expenditure Classes into Non-Discretionary and Discretionary
GroupNon-discretionaryDiscretionary
Food and non-alcoholic beveragesBreadCakes and biscuits
Breakfast cerealsIce cream and other dairy products
Other cereal productsSnacks and confectionery
Beef and vealWaters, soft drinks and juices
PorkRestaurant meals
Lamb and goatTake away and fast foods
Poultry 
Other meats 
Fish and other seafood 
Milk 
Cheese 
Fruit 
Vegetables 
Eggs 
Jams, honey and spreads 
Food additives and condiments 
Oils and fats 
Other food products n.e.c. 
Coffee, tea and cocoa 
Alcohol and tobacco Spirits
 Wine
 Beer
 Tobacco
Clothing and footwear Garments for men
 Garments for women
 Garments for infants and children
 Footwear for men
 Footwear for women
 Footwear for infants and children
 Accessories
 Cleaning, repair and hire of clothing and footwear
HousingRents 
New dwelling purchase by owner-occupiers 
Maintenance and repair of the dwelling 
Property rates and charges 
Water and sewerage 
Electricity 
Gas and other household fuels 
Furnishings, household equipment and servicesCleaning and maintenance productsFurniture
Personal care productsCarpets and other floor coverings
Other non-durable household productsHousehold textiles
Child careMajor household appliances
 Small electric household appliances
 Glassware, tableware and household utensils
 Tools and equipment for house and garden
 Hairdressing and personal grooming services
 Other household services
HealthPharmaceutical products 
Therapeutic appliances and equipment 
Medical and hospital services 
Dental services 
TransportAutomotive fuelMotor vehicles
Maintenance and repair of motor vehiclesSpare parts and accessories for motor vehicles
Other services in respect of motor vehicles 
Urban transport fares 
CommunicationPostal services 
Telecommunication equipment and services 
Recreation and culturePets and related productsAudio, visual and computing equipment
Veterinary and other services for petsAudio, visual and computing media and services
 Books
 Newspapers, magazines and stationery
 Domestic holiday travel and accommodation
 International holiday travel and accommodation
 Equipment for sports, camping and open-air recreation
 Games, toys and hobbies
 Sports participation
 Other recreational, sporting and cultural services
EducationPreschool and primary educationTertiary education
Secondary education 
Insurance and financial servicesInsurance 
Deposit and loan facilities (direct charges)