Consumer Price Index

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Consumer Price Index (CPI)? ABS Cat. No. 6401.0

The Reality Beyond the text Book?
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Headlines

• Banana, petrol prices drive inflation figures
  higher (2006)?

• Inflation not likely to take off - Costello
  (2007)?

• "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

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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

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The CPI defined

• 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.

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The CPI in use

• We're interested
• Government and agencies - RBA, Treasury, etc
• Analysts/speculators
• 
  
• Lobby groups

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The CPI - Australia
Quarter
CPI Index
Dec-04
146.5
s
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
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The CPI - Australia
Quarter
CPI Index
Rebased Dec 04
Dec-04
146.5
100.0
s
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
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Perth 16.3
Aust. 13.7
Melb. 13.1
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Perth 4.9
Aust. 5.0
Melb. 4.8
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Perth 1.0
Aust. 1.2
Melb. 1.2
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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'

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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

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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

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

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Constructing the CPI
All groups
Food
Group (11)?
Dairy and related products
Subgroup (31)?
Expenditure class (90)?
Cheese
Elementary aggregate
Cheese block
Cheese matured Bega Tasty 500g
Product Specification
Coles Ivanhoe
Location
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Consumer Price Index (formula)
p 1j
CPI (weighted)
? w 0j
p0j

• 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

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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

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Special Cases

• Comparing prices across capital cities
• spatial price index for Australia

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spatial price index for Australia
Darwin
Brisbane
Perth
Sydney
Adelaide
Canberra
Melbourne
Hobart
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spatial price index for Australia
Darwin
1.2
Brisbane
Perth
Sydney
Adelaide
Canberra
Melbourne
Hobart
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spatial price index for Australia
Darwin
1.2
Brisbane
1.2
Perth
Sydney
Adelaide
Canberra
Melbourne
Hobart
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spatial price index for Australia
Darwin
1.2
1.1
Brisbane
1.2
Perth
Sydney
Adelaide
Canberra
Melbourne
Hobart
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spatial price index for Australia
Darwin
1.15
1.0
Brisbane
1.15
Perth
Sydney
Adelaide
Canberra
Melbourne
Hobart
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n
Darwin
Brisbane
Perth
Sydney
Adelaide
Canberra
Melbourne
Hobart
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Questions ?

• w