Measurement of inflation - the Consumer Price Index (CPI)
The Consumer Price Index (CPI) is the most common measure of inflation and is calculated on a quarterly basis in March, June, September and December. The CPI measures quarterly changes in the price of a fixed 'basket' of goods and services which account for a high proportion of expenditure by metropolitan households. Approximately 100,000 price quotations are collected each quarter across the eight capital cities and the 'basket' covers a wide range of goods and services, arranged across eleven groups, which are weighted according to their relative importance to the 'typical' metropolitan household. The relevant groups and their weightings appear in the pie chart below.
While the CPI does not include the prices of all goods and services purchased by metropolitan households, it does include the prices of the most significant items. As the prices of the goods and services in the basket change from one period to the next, it provides an indication of both changes to the rate of inflation and changes in the ‘cost of living’ for the average Australian household.
The table below reveals that households on average spent $1,371.30 per week on goods and services. The expenditure group of ‘Housing’ was shown to be the most significant expenditure category, accounting for 22.3% ($305.75) of the average household spending of $1,371.30. The relatively high weight for Housing means that a 10% increase in housing costs (such as rent and other occupancy costs) will have a much bigger impact on the overall CPI (and therefore the average price level) than a 10% increase in the price of education (since the ‘Education’ category has a relatively low weighting of 3.2%, which equates to $43.67 per week).
Once all of the 100,000 prices are collected from across the country in the most recent quarter, they are applied to each of the numerous weighted expenditure categories within each of the 11 groups. The cost of the basket in the new quarter is then divided by the cost of the basket in the original quarter to determine the price change between the two periods. For example, the cost of the basket in the June quarter of 2011 was $1371.30. Hypothetically, if the cost of the same basket was $2056.95 in the June quarter of 2012 it means that the price change (or inflation) has been 50%.
This is calculated as follows:
$2056.95/$1371.30 = 1.5 times = 50%
In reality, the ABS converts the cost of each basket in subsequent periods into an index number. In this example, the base period becomes June 2011 with an index of 100. The index number for June 2012 is calculated in the following way:
(Cost of basket at end/Cost of basket in base year) X 100
($2056.95/$1371.30) X 100 = 150
The CPI for June 2011 and June 2012 then become:
2011 = 100
2012 = 150
Note that the starting point for any calculation of indexes is referred to as the ‘base year’ and it is given an index value of 100. When the ABS collects the data on prices for that year, they make the ‘basket’ of goods and services worth 100, and then they are able to compare the price of all future CPI ‘baskets’ to the price in the base year. For example, prior to 2012, the base year was 1989-90 and all CPI numbers after that year were compared to the base year value of 100. [The base year was changed in 2011 such that all new CPI numbers will now be referenced against the 2011 year rather than 1989-90]
Calculating inflation rates from index numbers
Once the ABS has formed index numbers, it is relatively straightforward to calculate the movement over time (i.e. the inflation rate). To calculate the inflation rate for any period of time involves use of the index numbers for the end of the period and comparing them to the index numbers for the start of the relevant period. The following formula should be used:
Inflation rate = Price index (end) - Price index (beginning) X 100
Price index (beginning)
For example, using the figures from the hypothetical example above, calculating inflation from the two index numbers is done as follows:
Inflation rate = 150 - 100 X 100 = 50%
To view the most recent inflation figures for Australia, see the latest ABS catalogue 6401.0
To determine how much inflation has changed over time, use the ABS’ Consumer Price Index Inflation Calculator.