The Consumer Price Index (CPI) is probably, rightly or wrongly, the most commonly used statistic in the calculation of inflation.
The percentage movements in the CPI are used in the 'indexation' of:
- various social welfare benefits provided by the government, eg basic family payments
- government excise duties, eg on beer, cigarettes and petrol
- business contracts of various types, eg building contracts and rental agreements.
(Indexation is the process whereby payments are increased so their value keeps pace with inflation.)
What is the CPI?
The CPI is a fixed weighted price index that relates to household expenditure on retail goods and services and other items such as housing, government charges and consumer credit charges. (A fixed weighted price index is one that measures the changes over time in the purchase price of an unchanging basket of goods and services - see below.)
Because it is a price index the CPI measures price movements from a reference base period (currently financial year 1989-90) which is assigned the value 100.0. The CPI does not measure price levels in dollars and cents.
Scope of the CPI
The scope of the CPI is capital city households where the members of the households are employees who obtain at least 75% of their income from wages and salaries. The top 10% of households, based on income, are excluded.
The CPI target households account for about 60% of the population of the eight capital cities and more than one third of the population of Australia.
Coverage of the CPI
The coverage of the CPI is the goods and services purchased by the capital city, wage and salary earner households (described above).
Expenditure patterns are determined for the CPI households predominantly from the Household Expenditure Survey (HES) that is run approximately every 5 years by the ABS. From the HES a basket of typical goods and services is determined and each item within the basket is given a weighting dependent upon its relative importance in the expenditure patterns of the target households.
Each quarter around 100,000 price quotations are collected to calculate the CPI. (Sometimes prices need adjusting to correct for changes in the quality of goods and services.) These prices are then sorted into 8 expenditure groups (food; clothing; housing; household equipment and operation; transportation; tobacco and alcoholic drinks; health and personal care; and recreation and education) which make up the basket of goods and services.
Since the CPI is a fixed weighted index it becomes increasingly outdated as time passes because the mix of goods and services purchased by the CPI households changes as prices change, as new products are introduced and as other products are no longer available. Therefore, the basket of goods and services is usually updated about every 5 years, when the results of the latest HES can be incorporated, to reflect the households' changing expenditure patterns.
A new CPI series is thus formed and is linked to earlier CPI series to form a chain of CPI series. The linking procedure is done in such a way that the differences in the prices of the old and new baskets have no effect on the index series.
The current CPI is the twelfth series that has been linked to form a continuous series from the September quarter 1948.
All Groups Index
The 8 expenditure groups for each of the capital cities are combined into the All Groups, weighted average of the eight capital cities index and this is the index that is generally referred to as the CPI. (More recently the percentage change in the All Groups index has also been called the headline rate of inflation to differentiate it from the underlying rate that is also calculated from the CPI and used in economic analysis.)
Calculation of Price Changes
The percentage change in prices between any two periods can be calculated from the CPI using the following formula:
MSB Table 2.4
Monthly Economic and Social Indicators Table 2.4 tabulates the All Groups, weighted average of the eight capital cities index along with the quarterly percentage change (ie change from the previous quarter) and annual percentage change (ie change from the same quarter of the previous year) in the index.
The annual percentage changes in the index are also presented in a graph.
The CPI is a quarterly series that is updated in the 4th week after the end of the quarter.
Further information can be obtained by contacting a member of the Statistics Group of the Parliamentary Research Service.
This feature was prepared by Stephen Barber.
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