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How the CPI is changing – and why that matters

 

If inflation measures prices, what prices exactly? How reflective of our real expenditure is the Consumer Price Index (CPI)?

Traditionally, the CPI has been measured a fixed basket of goods, based on information about what the ‘weighted average’ family has been spending. It uses current prices, but its base is anchored in a past assessment of what is actually purchased. That is changing, with the CPI becoming a more up to date measure of price movements.

Writing in The Conversation, the ANU’s Peter Martin outlined that the modern ‘basket of goods’ that is measured to determine the movement in consumer prices is heavily weighted to food (17.3%) and alcohol (5.3%), followed by petrol (3.2%) and combined 3.8% on electricity and gas.

Think about this for a moment. Assuming the basket of goods reflects our national expenditure – it does pretty much – we spend quite a bit more on juice for ourselves than for our vehicles. On average that is, though we are all certain we are operating below the average, of course!

The basket of goods is a complex and ever-changing beast, as Peter Martin reminds us. When chocolate bar sizes were reduced, the lower prices were not the only factor that changed. The ABS had to adjust for the amount of chocolate received as well. Equally, when computers double their processing power and the price rises, there is a complex formula to determine what the actual additional cost of computing is. And so on!

It was once the case that the CPI’s ‘basket of goods’ would change once every decade, when economists met in a dark corner with slide rules and grim determination to re-make the national shopping trolley in line with recent trends.

That is no longer the case. Real time retail data and similar information series are allowing the CPI to be – as Martin puts it – more a cost-of-living index than a cost of a fixed basket index.

For policy-makers, for businesses and even consumers, the modern CPI is an ever more powerful tool that tells us both where we are at, and where we may be headed.

5.3% of the basket of goods spent on alcohol? That’s going up, if we are any judge!

 

Posted Date: August 25, 2021

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