Why we distrust the Consumer Price Index

Exploring the doubts about the accuracy of the Consumer Price Index.

Vital Signs: Why we distrust the consumer price index

File 20181108 74778 oeahjq.png?ixlib=rb 1.1 Officially, our inflation rate is lower than at any time since the 1950s, but we’ve reasons for doubting it. Shutterstock Richard Holden, UNSW

Officially, Australia’s rate of inflation is 1.9 per cent.

It’s the lowest it has been on a sustained basis since the 1950s and early 1960s.

But try to tell that to anyone and they will laugh at you, or worse.

The Bureau of Statistics is careful to say that the consumer price index isn’t a measure of living costs.

It creates that slightly differently, producing a collection of less-reported indexes that were updated this week.

On these measures, over the past year living costs have climbed two per cent for households headed by an employee, 2.2 per cent for households headed by Australians on most types of benefits, 2.3 per cent for households headed by age pensioners, and also 2.3 per cent for households headed by self-funded retirees.

The main difference between the consumer price index and the living cost indexes is that “living costs” include interest paid on mortgages whereas “consumer prices” do not.

Regardless, most of us would be pretty certain that even on these measures, what’s reported is too low.

We’re irrational

In part, this is because we are not rational. As Nobel Laureate Richard Thaler has pointed out, we often engage in “mental accounting”.

In general this means we notice losses more than gains. In this context, it means we focus more on the things that have gone up in price than on those that have gone down or remained unchanged.

Also, our mental basket of goods is generally not the same as the basket of goods the bureau measures, even though it should be.

It’s not our basket

Four times a year in multiple locations throughout each capital city the bureau attempts to collect information about the prices of the thousands of goods (and some services) that make the “basket” it thinks represent they typical household’s purchases.

The basket is divided into about 100 subgroups; things such as bread, milk, eggs, fruit, men’s footwear, women’s footwear, men’s clothes, women’s clothes, restaurant meals, electricity and so on.

Because it can’t price everything, it zeros in on a few representative items within each category.

For meat and fish the ABS includes beef sausages (1kg) and pink salmon (210g can). For processed fruit and vegetables it includes sliced pineapple (450g can) and frozen peas (500g pkt).

If you buy something different, the exact changes in the prices you pay won’t be fed into either the consumer price index or your living cost index, but the indexes are likely to move in line with your living costs in any case.

Things get left out

Many things are missing from the index, among them recreational drugs, gambling and prostitution.

Being bean counters, rather than priests, the bureau says it excludes these sorts of items on practical rather than moral grounds.

Gambling is excluded as it is difficult to establish the service or utility that households derive from gambling, and thus to determine an appropriate price measure. Recreational drugs and prostitution are both excluded as it is very difficult and indeed dangerous to obtain estimates of prices and expenditures, or to measure quality change.

Other things are excluded because their prices are deemed to be too volatile. The price of bank deposits and loans was removed from the main index a few years back.

And goods keep getting better

Where our views about prices are most likely to differ from the bureau’s is where goods get better.

The bureau factors quality improvements into the prices it reports. If, for instance, your next mobile phone costs as much as your last one but includes extra features such as more memory or an improved camera, the ABS will report that it has fallen in price.


Read more: Moore's Law is 50 years old but will it continue?


This sort of adjustment for quality makes sense when adjusting down the price of a can of baked beans because it has been replaced by one slightly bigger, but is a grey area when it comes to improved features.

If the speed of the chip on your next laptop doubles, does that really mean the laptop is twice as good as the old one and should be said to have halved in price? Or should its price be recorded as having fallen by a lesser amount, or not at all seeing as the price hasn’t changed and it remains a standard laptop?

Often older models with lesser features are often no longer available. It’s impossible to buy a cheaper replacement.

The CPI is infrequent

The Reserve Bank is worried about the frequency of the index. It comes out only once a quarter, and up to a month after the quarter has finished.

Every developed country other than Australia and New Zealand releases its index monthly.

Given that the bank considers changing interest rates once every month, and given that the consumer price index is one of the two key measures it uses to guide its decisions (the other is the unemployment rate), a quarterly index leaves it somewhat in the dark and (when things are changing fast) potentially dangerously misled.

The bureau responds that it is prepared to release its index monthly, if it is paid to do it.

The ABS is persuaded there would be a significant benefit from more timely and responsive economic management if a CPI of equivalent quality to the current quarterly index were available monthly. Additional funding will be required to meet the costs involved in compiling a monthly index.

It’s just what we need – bureaucratic blackmail.

But it’s improving

On the positive side, new technologies have allowed more accurate price collection to make the index more precise. A key innovation is the rise of so-called “scanner data”, tracking expenditures at checkouts based on the prices people actually pay.

Scanner data has been used since 2014 and is now responsible for about one quarter of the prices reported. Field officers compile much of the rest using hand-held devices to type in prices they read off supermarket shelves.

The move to scanner data was spearheaded by the work of my UNSW School of Economics colleague Professor Kevin Fox.


Read more: A cashless society and the five forms of mobile payment that will get us there


There is a prospect of it becoming more widespread as more and more purchases are made with debit and credit cards and with point-of-sale software on devices such as tablets at coffee shops.

And important

Whether or not we like what it says, the consumer price index is important and lies behind much of what we do.

A whole range of government payments and duties are indexed to it – these change when the consumer price index changes. Benefits such as Newstart and family payments are indexed as are excise duties such as those on petrol and beer.

Even the private sector relies on the consumer price index to adjust payments under contracts such as rental agreements or construction charges.


Read more: Joe Hockey's user pays plan for the ABS doesn't add up


Collecting it is an enormous and painstaking exercise.

Governments of both stripes would do well to remember that when next they think of cutting the bureau’s budget.The Conversation

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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    COMMENTS

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    Jim
    12th Feb 2019
    11:10am
    If I wasn’t confused before I am now, so is the CPI accurate or not? I see no mention of seasonal price changes so are things like that averaged out over 12 months, if so how can they be reported on quarterly. Petrol prices vary state by state and again they vary on price cycles and in some instances this year petrol has been cheaper than it was years ago, I know some things only go one way and that is up, eg health insurance and for people renting, I haven’t seen beer going down either, it would seem certain things only go one way and that is up, is that because the average person likes a beer and maybe a smoke now and again?
    MICK
    12th Feb 2019
    12:42pm
    Of course its not accurate Jim. Hasn't been for a long long time. Next time you go into Woolworths or Coles, pay your rates, insurance, grog, tradesmen, lawyers & other professionals, etc. ask what those items cost 10 years ago. There lies your answer.
    I may note that claiming a low low CPI is one way of holding down wages for average Australians. Read my lips.
    Rae
    12th Feb 2019
    1:39pm
    Exactly MICK. It holds down pensions too.

    I'm dubious these days when we are called a "developed " country. We rarely do anything the other OECD countries do.
    Anonymous
    12th Feb 2019
    1:40pm
    Mick is delusional
    Real wages have been increasing for decades
    TREBOR
    13th Feb 2019
    11:41pm
    I used to use the GPI - the Guinness Price Index - which calculated how many pints of Guinness I could purchase a day on my income.... that has steadily eroded over the years from three down to about 1.5....

    Devastating.
    Jim
    12th Feb 2019
    11:12am
    If I wasn’t confused before I am now, so is the CPI accurate or not? I see no mention of seasonal price changes so are things like that averaged out over 12 months, if so how can they be reported on quarterly. Petrol prices vary state by state and again they vary on price cycles and in some instances this year petrol has been cheaper than it was years ago, I know some things only go one way and that is up, eg health insurance and for people renting, I haven’t seen beer going down either, it would seem certain things only go one way and that is up, is that because the average person likes a beer and maybe a smoke now and again?
    Jim
    12th Feb 2019
    11:13am
    If I wasn’t confused before I am now, so is the CPI accurate or not? I see no mention of seasonal price changes so are things like that averaged out over 12 months, if so how can they be reported on quarterly. Petrol prices vary state by state and again they vary on price cycles and in some instances this year petrol has been cheaper than it was years ago, I know some things only go one way and that is up, eg health insurance and for people renting, I haven’t seen beer going down either, it would seem certain things only go one way and that is up, is that because the average person likes a beer and maybe a smoke now and again?
    Karl Marx
    12th Feb 2019
    11:13am
    can people please remove repeat responses or learn to just post once, bloody annoying
    Apart from that, expect the usual trolls to start up. Best not even to reply or respond to their usual ridiculous posts & comments.
    ray from Bondi
    12th Feb 2019
    11:17am
    sob you stole my favourite subject https://en.wikipedia.org/wiki/Nineteen_Eighty-Four
    ray from Bondi
    12th Feb 2019
    11:19am
    I am having the same trouble and that is why this has happened I think, I press send and nothing happens so I press again, I just woke to hitting refresh for the page but that should be automatic :)
    Jim
    12th Feb 2019
    12:44pm
    How do you remove a post, I really don’t want to be annoying anyone, I tried to post and was unsuccessful so tried again then a 3rd time still nothing, it was only sometime later that I noticed it had come up 3 times, I am in the middle of the Pacific so maybe that’s why the post didn’t come up straight away.
    Sundays
    12th Feb 2019
    12:57pm
    Jim, post as normal. You’re successful but can’t use it. Then go back to the article and come back. You will only see one post. This is for phone or iPad. Those with computers say pressing F5 works
    Triss
    12th Feb 2019
    1:21pm
    Post as usual, Jim, if you see multiple posts just press ‘remove ‘ under your name.
    Jim
    12th Feb 2019
    1:48pm
    Thanks guys, I have tried the first suggestion from Sundays but I must be doing something wrong because it didn’t work, and the second from Triss, there isn’t a remove under my name only a reply. Never mind I will try and be more careful in future.
    The Care Bear.
    12th Feb 2019
    5:19pm
    Pressing F5 after posting will refresh the screen and you will see your post.
    ray from Bondi
    12th Feb 2019
    11:14am
    it is unbelievable that successive governments expect us to believe that costs have not risen by much, what they use to compare is very biased so that pensions and like do not go up. power rises are astronomical, shop at Woolworths or similar and it always a little dearer, and just what goes down to not notice, there is nothing that goes down, well maybe fuel is up and down, but that rises overall in time, what a load of rot.

    12th Feb 2019
    11:59am
    I don't know if anyone has noticed that Coles and Woolworths don't have a standard price for items. The prices vary from place to place and appear to be ruled by the affluence of the area. A friend who works at a Coles supermarket won't shop where she works but chooses to shop at a Coles supermarket a few suburbs away which is in a lower socioeconomic area because the prices across the board are quite cheaper. Whilst this may not seem to be just a marketing tactic, it also may affect the "basket" when the CPI is being calculated.
    ray from Bondi
    12th Feb 2019
    12:02pm
    yep, you are right I have the luck to be living in the middle of an affluent tourist area and it sucks, I notice a price difference and especially in fresh produce, sadly anything that will make it look bad will be removed from the calculation.
    https://www.allgovernmentslie.com/
    KB
    12th Feb 2019
    12:38pm
    I once had to had to CPI cost of living through the Bureau of Statistics which was compulsory Have noticed price increases that I have normally buy. Yes we are having issues with trying email comments Yes products will go up due to what happens in the weather such as recent drought and now floods in Queensland.
    KB
    12th Feb 2019
    12:39pm
    I once had to had to CPI cost of living through the Bureau of Statistics which was compulsory Have noticed price increases that I have normally buy. Yes we are having issues with trying email comments Yes products will go up due to what happens in the weather such as recent drought and now floods in Queensland.
    KB
    12th Feb 2019
    12:39pm
    I once had to had to CPI cost of living through the Bureau of Statistics which was compulsory Have noticed price increases that I have normally buy. Yes we are having issues with trying email comments Yes products will go up due to what happens in the weather such as recent drought and now floods in Queensland.
    KB
    12th Feb 2019
    12:39pm
    I once had to had to CPI cost of living through the Bureau of Statistics which was compulsory Have noticed price increases that I have normally buy. Yes we are having issues with trying email comments Yes products will go up due to what happens in the weather such as recent drought and now floods in Queensland.
    KB
    12th Feb 2019
    12:39pm
    I once had to had to CPI cost of living through the Bureau of Statistics which was compulsory Have noticed price increases that I have normally buy. Yes we are having issues with trying email comments Yes products will go up due to what happens in the weather such as recent drought and now floods in Queensland.
    KB
    12th Feb 2019
    12:39pm
    I once had to had to CPI cost of living through the Bureau of Statistics which was compulsory Have noticed price increases that I have normally buy. Yes we are having issues with trying email comments Yes products will go up due to what happens in the weather such as recent drought and now floods in Queensland.
    MICK
    12th Feb 2019
    12:44pm
    Wow. One way to make a point.
    Misty
    12th Feb 2019
    6:06pm
    Sure is.

    12th Feb 2019
    1:02pm
    The CPI figures are accurate
    Those who think otherwise have perception and other issues best sorted out by a medical practitioner or their accountant
    Rae
    12th Feb 2019
    1:42pm
    So says the Government haha. Yes everything is just dandy for those overpaid incompetents. They can just claim it on their taxpayer tab.
    ray from Bondi
    12th Feb 2019
    3:00pm
    Oh it is always a joy to see that the Orwellian big brother government keeps its beady eye on us malcontents, can Lothario really believe what he is writing does he work for the Ministry of Truth, that department is very big with the liberals, but then there are fanatic right-wing liberal dystopian followers who drink in every word as if it is gospel, I actually have increased the funding to the ABC, of course, the libs do they just said so, banks are honest and we do need a royal commission of course that is the truth the libs have said so. :)
    Sundays
    12th Feb 2019
    3:21pm
    The data collected is likely accurate, its the items missing ie not collected from the basket of goods and services that is the problem
    Sundays
    12th Feb 2019
    1:04pm
    I think we would get better information if the CPI was released monthly. The Government doesn’t fund them properly. They have even had to rent accommodation in Canberra which cant fit them all in, so work from home and hot decking (sharing of desks) has been introduced. A friend who has worked there for 30 years says morale is now low
    Rae
    12th Feb 2019
    1:43pm
    Selling off all your building isn't so clever is it.
    pjvixen
    12th Feb 2019
    2:04pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:05pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:05pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:05pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:05pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:05pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:06pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:06pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:06pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:07pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:07pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    pjvixen
    12th Feb 2019
    2:07pm
    Outside of food we do not purchase clothing or many of the many other items included. Thus our cost of living has risen far higher than the 1.9% quoted. The pension has not even met this increase, let alone our actual figure.
    The Care Bear.
    12th Feb 2019
    5:21pm
    pjvixen, after you press POST, press Function Key F5, this will refresh your screen and you will eliminate your multiple posts.
    Misty
    12th Feb 2019
    6:08pm
    Doen't look liike YLC'S have fixed the problem does it.
    Franky
    12th Feb 2019
    2:27pm
    The CPI is a classic case of fiddling the figures. I am one of those laughing at it, as it's clearly irrelevant to the real life situation of most citizens.
    The Care Bear.
    12th Feb 2019
    5:26pm
    It is relevant because it is the basis of many of Govt. expenditure calculations.
    Accuracy is another issue.
    ray from Bondi
    12th Feb 2019
    9:10pm
    here here
    musicveg
    12th Feb 2019
    6:13pm
    Now we know why the Government does not raise wages, Newstart and Pensions because of the low CPI even though cost of rent and bills have risen. I just fought for a lower rent increase, Real Estate wanted to put it up $15 per week and eventually agreed (after much discussion) to $10. So I have to come up with another $520 per year which means I will spend less elsewhere while my landlord and real estate profit more. My cost of food has not changed at all, but then I don't buy many of the things the CPI checks.
    ray from Bondi
    12th Feb 2019
    9:12pm
    yep it is the biggest con job since we were told banks would give pensioners a deeming account for their savings, try and find one where your money receives the deeming rate Orwellian government says we can, it is just manageable if you have spare cash and do not withdraw, I think most pensioners would find that im[possible and this deemed rate is supported by ALL governments.
    GeorgeM
    12th Feb 2019
    11:21pm
    "If, for instance, your next mobile phone costs as much as your last one but includes extra features such as more memory or an improved camera, the ABS will report that it has fallen in price." Sounds like defective logic which will push down the CPI. It should be based on Replacement Cost, to buy the most similar item now available.
    Eddy
    13th Feb 2019
    12:55pm
    Sorry about my late response but I do not have time to sit on YLC all day. However I hope all respondents are aware that nearly all Centrelink payments are indexed by PBLCI (Pensioner and Beneficiary Living Cost Index) or CPI, whichever is the greater. Needless to say the PBLCI wins almost any time. For most of us CPI is a meaningless index as it does not apply to our situation (unless you are a Commonwealth Superannuation Scheme pensioner).
    ray from Bondi
    13th Feb 2019
    6:55pm
    I have looked up the two and there is only 20 points difference, what that does that equate to I wonder in $$$.
    Eddy
    13th Feb 2019
    11:05pm
    Ray, over the longer term a lot. For instance from December 1989 to September 2018 the single old age pension increased by 209% whereas superannuation pensions indexed by CPI
    increased by only 108%.
    Ref http://scoa.asn.au/indexation/
    ray from Bondi
    14th Feb 2019
    11:08pm
    thanks for the update
    TREBOR
    13th Feb 2019
    11:46pm
    Let's face it - nobody trusts government any more - even Chwissie Pyne was saying that politics is broke in Australia - and we all know that government departments are self-serving and run by contract employees who do as they are told.