most common indicator for the
inflation rate is the Consumer Price
Index (CPI)
The consumer
price index (CPI)
CPI - measure of inflation or the average level
of prices of a basket of goods and services
produced by typical metropolitan households in
capital cities.
Metropolitan households include employee,
pensioner, unemployed, employer.
has important features
regiman
Prices Surveyed
Weighting of Items
Base Year
Regiman
types of goods and
services selected to
measure changes in prices.
CPI measures the prices changes of around 100,000 individual items
which are divided into categories including food, clothing and footwear,
housing, household contents and services, transportation, tobacco and
alcohol, health, recreation, education, communication and financial and
insurance services.
Base Year
price changes are compared to the price at the start of the year
which is also known as the base year.
CPI changes it is given a value equal to 100 index points and then is
put against the CPI at the start of the base year.
Prices Surveyed
quarterly price survey is carried out
in a representative range of retail
outlets either private and public
sectors.
Weighting of Items
Weighted according to its relative importance in
overall household expenditure.
Expensive and frequently purchased items have a greater bearing. (food)
Weights are reviewed every 5 years.
Limitations of the CPI as a
measure of inflation
CPI data provides a guide to general retail
prices in the Australian economy
Its accuracy though depends on several factors.
Lack of
representativeness of
the prices.
Only 100,000 selected consumer items
appropriate for households are included.
Inflation rates may be a misleading
indicator for people who don’t live in
capital cities
Weighting limitations of items
in the regimen
Weighting in the regimen may be inappropriate and
unreflective of the actual pattern of expenditure
EG) if meat went up in price and caused CPI to rise faster, the
inflation figure may be misleading for vegetarian households.
The effect of once-off volatile events
on the headline inflation rate
Headline CPI - where prices changes in all 11 categories
are included in the calculation of CPI
affected by 1 off events
CPI fails to reveal the underlying rate of
inflation despite these events.
Underlying Inflation Rate - measured by removing
volatile items affected by once off events such as some
fresh food items, from the normal CPI regimen in order
to obtain an inflation rate that is more truly reflective of
ongoing changes in the level of price.
range of measures if the underlying inflation rate has therefore developed including the trimmed mean CPI and weighted
median CPI. Both have smaller regimens that exclude various unusual events such as floods and droughts.