Turning an eye to the CPI

Update: All ABS submission to the inquiry are now online. For my money, the most enlightening is point 3.2.2 of the Australian Treasury submission.

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The ABS are undertaking the first major review of the Consumer Price Index in 13 years, and Rob Bray (who has just moved into the office next door) has just put a very detailed submission. If you don’t have time to read the entire 58 pages, here’s Rob’s summary:

• The current CPI was specifically selected at the time of the 13th Series Review to be a measure of price change for the purposes of monetary policy:
– In this capacity it less effectively provides a measure of the changes in the Cost of Living for households in Australia, despite the fact that this is the way in which the measure is most frequently perceived.
– Notwithstanding this change, the headline CPI is only one of a wide range of indicators used for monetary policy setting, and the sole focus of the CPI on this hence appears neither justified, and risks the measure not only being inadequate for other purposes, but carries the potential for the measure to lose credibility with the population.

• All price indexes are subject to bias. This is also the case with the CPI. Specifically:
– The use of a fixed basket of goods overstates price change where consumers substitute products and change their consumption pattern;
– The plutocratic nature of the index, which weights the contribution of households to the CPI by their level of expenditure, while making the index representative of price change in spending across the population, means it can be unrepresentative of the spending of ‘average households’; and
– The approach to quality adjustment may mean that the index is not indicative of the actual change in the cost of living.
– As the first of these is likely to bias the index upwards, the second two may have biased it downwards over recent years (as a measure of the change in the cost of living of an ‘average household’); it is unclear what the overall balance of bias is.

• Decisions such as the primary purpose of the CPI are not statistical decisions, but rather involve ABS deciding which balance of interests it will support relative to other users. This policy is then accompanied by an ABS policy to avoid “publishing measures that could be viewed as competing with the headline CPI measure”.
– This approach is poor statistical practice.
– The need to ‘protect the CPI from competition’ hinders an environment of openness and critical review of the CPI.

• Reflecting this the specific issues raised in this submission encompass:
– Weighting:
· Reliance upon fixed weights which do not reflect substitution and changing patterns of consumption between the 6 yearly HES.
· An inappropriate treatment of the costs of home purchasers and owners which means housing costs are underweighted.
· Use of a weighting pattern which is unduly reflective of the consumption patterns of higher income households.

– Prices:
· Whether the ‘constant quality’ adjustments of some items do not realistically reflect either the utility individuals gain from changes in quality not their capacity to meet needs in the market.

– Openness and transparency:
· A less defensive approach to a ‘headline measure’.
· Greater variety of indicators reflecting the differing needs and interests of users.
· Reforms to the approach to revision.
· Further improvements to the amount of information provided on the CPI and its components.
· An active program of research and analysis the results of which are available to users.

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