The measurement of inflation

Price rises are generally measured quarterly, but inflation rates are quoted as an average annual figure. The main measure is the Consumer Price Index.

Consumer Price Index (CPI): a measure of the variations in the retail prices of a basket of goods and services representing a high proportion of the expenditure of most metropolitan households.

Measuring the Inflation rate

This basket of goods and services has been selected to represent purchases by all metropolitan private households and covers expenditure on the following broad items: ◦ Food◦ alcohol and tobacco◦ clothing and footwear◦ housing◦ household furnishings◦ Financial and Insurance services◦ health◦ transportation◦ communication◦ recreation◦ education

To ensure the basket remains representative of current spending habits, it is revised about every five years.

Features of CPIRegimen

Prices surveyed

Located in Australia’s eight capital cities.

The ABS surveys the prices for the items included in the regimen. It does this at a representative range of retail outlets. ( e.g. Supermarkets, department stores, takeaway food outlets, chemists and providers of services including power, water and gas)

Items are included in the CPI regimen are weighted according to their relative importance in typical household budgets.

The weights reflect the cost of the item and its frequency of purchase.

Things that are expensive or frequently purchased have a greater bearing on index trends( food, housing) than items of less significance( education).

Weights are reviewed every five years.

Weighting of items

Price changes over a period of time are compared against the price or cost of the regimen in a base year. Currently, the base year for our CPI is 1989-90 and this is given a value equal to 100 index points.

For instance, in June 2010 the CPI was measured at 172.1 points as against 167.0 in June 2009. On this basis, there was a 3.1 percent inflation rate(figure rounded) between June 2009 and June 2010. This annual rate was calculated as follows:

Base year

Annual CPI rise(percent inflation) for 2009-10=

Number of points increase in CPI ×100 Value of CPI in the first year=(172.1-167.0)×100

167.0=5.1×100 167.0=3.05%

The calculation of inflation rate

Classroom Activity Calculating inflation rates

% increase in CPI on previous quarter

Year(June on June)

CPI Index Inflation rate (%)

2005-2006 102.0 N.A.

2006-2007 106.3 4.2%

2007-2008 112.5 5.8%

2008-2009 113.7 1.06%

2009-2010 114.8 0.97%

2010-2011 113.6 -1.05