Feature Article—CPI measures and retail trade changes
Consumer prices in the Monthly Statistical Bulletin
The Monthly statistical bulletin
has traditionally reported the Australian Bureau of Statistics (ABS) measure of
consumer prices—the Consumer Price Index (CPI). Starting with the October 2009 edition,
Table 2.4 will be expanded to include a measure of ‘underlying’ or ‘core’
inflation, based on statistical manipulations of the CPI designed by the
Reserve Bank of Australia (RBA).
Consumer prices generally
The CPI measures the relative cost
of a basket of goods and services purchased by capital city households. The
basket includes up to 100 000 goods and services allocated to 11
categories, consisting of 90 expenditure classes. These classes are weighted in
terms of their relative importance in households’ budgets. The basket is
updated every five years to incorporate changes in the composition of household
purchases.
Changes in the CPI measure
inflation in Australia, and this measure is often referred to as ‘headline
inflation’.
Reserve Bank measures
Headline inflation incorporates price
classes which change by large magnitudes for reasons other than a shift in
value. For example, fruit is seasonal and also can be affected by extreme
weather events, both of which affect availability and therefore the price paid
by consumers.
To address this issue, the RBA
created measures which smooth these volatile fluctuations to try and estimate a
‘core’ or ‘underlying’ rate of inflation. These measures are the ‘trimmed mean’
and ‘weighed median’.
Basically, the trimmed mean is
calculated in stages. First, the percentage changes in all CPI classes are
ordered by their relative size. Then, the top and bottom 15 per cent of
classes, by percentage price movement, are excluded from consideration.
Finally, the remaining middle 70 per cent of classes are used to create a
weighted average, or ‘mean’.
The weighted median is effectively
a secondary measure. The middle 70 per cent of classes from the trimmed mean process
is the benchmark set of data. The weighted median measure is the price change
observation that is in the middle of this benchmark set of data.
In public reporting it is typical
that the changes in these two measures are averaged to provide the estimate of
core inflation. This convention has been adopted in this bulletin.
The underlying or core rates of
inflation are important as they are, typically, the rates considered by the
Board of the RBA when they pursue an ‘average two to three per cent’ inflation rate
target, using monetary policy instruments like the overnight cash interest rate.
An example of observed
differences
Graph 1 compares quarterly changes
in the average of the RBA measures and the CPI. The key point is that the RBA average
tends to be smoother than the CPI changes and, therefore, is much more like a
trend rate of change.
Graph 1: Quarterly change in
prices—RBA and ABS
Monthly
statistical bulletin Table 2.4
The bulletin
print edition Table 2.4 has been updated to include index values, quarterly and
annual changes for the CPI, as well as the average of the annual underlying
rates of inflation. The print edition graph will show the annual underlying and
headline rates of inflation including a visual identification of the 2-3 per
cent RBA inflation target range. In addition, the electronic database will
report both of the RBA measures in more detail.
Changes to retail
trade
The ABS
implemented changes to the scope of the retail trade survey in its July Retail
Trade publication.
The changes resulted
from adopting a revised set of Australian New Zealand Standard Industrial
Classifications (ANZSIC). ANZSIC 2006 changed the definitions of some
industries compared to its predecessor, ANZSIC 1993. In addition, some
activities which were retailing were transferred into alternative
classifications and some activities which were not previously retailing were bought
into scope.
The data in the Retail
Trade publication are reported on the new ANZSIC categories. The effect is a
consistent upward shift in monthly retail trade. The changes were backcast to
April 1982. Further changes have been foreshadowed, including publication of
trend estimates and a change in seasonal weighting patterns. When these changes
occur further revisions to this bulletin may also be required.
Table 4.1, in
the print and electronic editions, has been updated to include retail trade
data based on the revised ANZSIC basis. This means that data in Table 4.1 of
this edition of the bulletin should not be compared to earlier print or
electronic editions, as the data are inconsistent.
Adrian
Makeham-Kirchner
Statistics and Mapping Section
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