Inflation and CPI

1. Consumer Price Index
(CPI)
ABS Cat. No. 6401.0
The Reality Beyond the text Book?

2. Headlines
Inflation not likely to take off -
Costello (2007)
Banana, petrol prices drive
inflation figures higher (2006)
"The consumer price index (CPI) is ...
expected to rise to 4.25 per cent by June
and 4.5 per cent by December before
declining to 3.25 per cent to 3.5 per cent
next year." SMH May 2008

3. Contents
The CPI defined
The CPI
The CPI in use
Limitations of the CPI
Compiling a CPI
Extensions cases
–spatial price indexes for Australia
Questions

4. the CPI is an index
the CPI measures the changes in the price of a fixed basket of goods
and services acquired by household consumers
the CPI directly relates only to consumer goods and services priced in
the eight capital cities
the CPI is designed as a general measure of price inflation for the
private household sector.
The CPI defined

5. The CPI in use
We're interested
Government and agencies - RBA, Treasury, etc
Analysts/speculators
Lobby groups

6. The CPI - Australia
s
Quarter CPI Index
Dec-04 146.5
Mar-05 147.5
Jun-05 148.4
Sep-05 149.8
Dec-05 150.6
Mar-06 151.9
Jun-06 154.3
Sep-06 155.7
Dec-06 155.5
Mar-07 155.6
Jun-07 157.5
Sep-07 158.6
Dec-07 160.1
Mar-08 162.2
Jun-08 164.6
Sep-08 166.5

7. The CPI - Australia
s
Quarter CPI Index Rebased Dec 04
Dec-04 146.5 100.0
Mar-05 147.5 100.7
Jun-05 148.4 101.3
Sep-05 149.8 102.3
Dec-05 150.6 102.8
Mar-06 151.9 103.7
Jun-06 154.3 105.3
Sep-06 155.7 106.3
Dec-06 155.5 106.1
Mar-07 155.6 106.2
Jun-07 157.5 107.5
Sep-07 158.6 108.3
Dec-07 160.1 109.3
Mar-08 162.2 110.7
Jun-08 164.6 112.4
Sep-08 166.5 113.7

9. Perth 16.3%
Melb. 13.1%
Aust. 13.7%

10. Perth 4.9%
Aust. 5.0%
Melb. 4.8%

11. Perth 1.0%
Aust. 1.2%
Melb. 1.2%

15. What the CPI is not
the CPI does not directly relate to goods and services
acquired for commercial
purposes
the CPI is not a measure of price levels across different cities
the CPI is not a measure of the 'cost of
living'

16. Composition of the CPI Basket
Based on the pattern of household expenditure as
determined by Household Expenditure Survey
The basket must attempt to maintain constant quality over
time
Basket is divided into 11 broad groupings

17. The CPI Structure
The 11 groups are:
Food
Alcohol and tobacco
Clothing and footwear
Housing
Household contents and services
Health
Transportation
Communication
Recreation
Education
Financial and insurance services

18. The CPI Structure (cont'd)
CPI Group weightings, across 8 capital cities.

19. Pricing Items for the CPI
About 100,000 separate price quotations are collected each
quarter
Typically, volume selling brands are priced
Same item in each capital city, from a representative
selection of sources

20. Constructing the CPI
All groups
Food
Cheese
matured Bega
Tasty
500g
Coles Ivanhoe
Dairy and
related
products
Cheese block
Cheese
Group (11)
Expenditure class
(90)
Subgroup (31)
Elementary
aggregate
Product
Specification
Location

21. CPI (weighted) =
Laspeyres Index Formula
where:
° p1j is the comparison period '1' price for item 'j'
p0j the base '0' period price for item 'j'
W0j are the quantity weights for item 'j' in base period '0'
e.g. item 'j' might be a bottle of wine
Consumer Price Index (formula)
p 1j
 w 0j
p0j

22. Summary to date
Looked at graphs of the CPI
Briefly outlined some of the uses for a CPI
What the CPI isn't
Outlined the structure and compilation of a CPI

23. Special Cases
Comparing prices across capital cities
spatial price index for Australia

24. Adelaide
Melbourne
Sydney
Brisbane
Perth
Darwin
Hobart
Canberra
spatial price index for Australia

25. Adelaide
Melbourne
Sydney
Brisbane
Perth
Darwin
Hobart
Canberra
spatial price index for Australia
1.2
%

26. Adelaide
Melbourne
Sydney
Brisbane
Perth
Darwin
Hobart
Canberra
spatial price index for Australia
1.2
%
1.2
%

27. Adelaide
Melbourne
Sydney
Brisbane
Perth
Darwin
Hobart
Canberra
spatial price index for Australia
1.2
%
1.2
%
1.1%

28. Adelaide
Melbourne
Sydney
Brisbane
Perth
Darwin
Hobart
Canberra
spatial price index for Australia
1.15
%
1.15
%
1.0%

29. Adelaide
Melbourne
Sydney
Brisbane
Perth
Darwin
Hobart
Canberra
n

30. Questions ?
w