The ABS maintains a program of periodic reviews of the Consumer Price Index (CPI) to ensure it continues to meet community needs. Today the ABS releases the details of the 17th series review, which they state is a minor review of the CPI.
For the 17 series the ABS has updated of the upper level (expenditure class) weights in line with the latest Household Expenditure Survey (HES) This is done to as the CPI is fixed weight index and the weights have to be revised from time to time bring them in line with the latest spending patterns associated with changing technology and individual preferences as well as correcting a substitution bias that emerges over time as spending tends to rise (fall) for items where relative prices have declined (risen). For more information on this process please see the Economic Bulletin “Australian Inflation – Upcoming CPI re-weighting to lower inflation”.
The 17th series CPI will be implemented in the December quarter CPI, due to be released on 31 January 2018. Using our bottom-up approach for forecasting inflation we find that the reweighting lowers our December quarter forecast by 0.1ppt to 0.4%qtr. At two decimal places the impact of the reweighting was –0.06ppt pointing to an annualised impact of 0.25ppt. Looking out to next four quarters to September 2018 the impact is 0.35ppt taking the annual pace of headline inflation to 2.0%yr.
In regards to the RBA and what impact these changes could have, applying the revised weights to our bottom up forecasts we find that our headline inflation forecast is 0.4ppt lower at 2.0%yr by end 2018. We also find that the re-weighting lowers our core inflation forecast by 0.2ppt. to 2.0%yr by end 2018. So it is clear is that the reweighting of the CPI will make it increasingly hard for the RBA to hit its inflation target in the medium term. The Australian economy just does not have the inflationary impulse in the sectors that are inflating (housing is the key here) to offset the disinflationary pressures that dominate the consumer retailing space.
Looking into the details a bit further a large part of the revision to our forecasts is due to the lowering of the weight for tobacco in the 17th CPI. It moves from our implicit estimate for December 2017 (before re-weighting) of 4.1% to 2.6%. At the 16th reweight in 2011 tobacco’s share of the CPI was 2.3%.
The other significant change was housing which share fell 1.7ppt to 22.7% due to dwelling purchase costs falling to 7.8% from 9.2%. At the 16th series reweight in 2011 dwelling purchase share was 8.7%. This might be a bit counter intuitive given the surge in house prices we have experienced since 2011, especially in Sydney and Melbourne, but you have to remember that what the CPI measures is the cost of constructing a new home and it excludes land values.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
