Housing to receive bigger focus in new CPI

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By Leith van Onselen

The Australian Bureau of Statistics (ABS) has just released new weights for the consumer price index (CPI), effective from the December quarter, which will give greater emphasis to housing-related costs.

Below is the media release:

The Australian Bureau of Statistics (ABS) has today released new Consumer Price Index (CPI) weights that will be used to compile the CPI from the December quarter 2017, which is due for release on 31 January 2018.

CPI expenditure weights reflect household spending on goods and services and are calculated using information from a range of ABS surveys, in particular the Household Expenditure Survey.

The new expenditure weights have been released by the ABS in an information paper entitled Introduction of the 17th Series Australian Consumer Price Index, 2017. New weights have also been published for the Selected Living Cost Indexes (SLCIs), which is due for release on 7 February 2018.

The Chief Economist for the ABS, Bruce Hockman, said: “The 17th series CPI weights show metropolitan households continue to spend the greatest proportion of their expenditure on Housing (22.7 per cent), followed by Food and non-alcoholic beverages (16.1 per cent) and Recreation and culture (12.7 per cent).”

The weight for housing expenditure has increased, driven by rents and utilities. Over the past six years, Australia’s capital cities have seen an increase in the proportion of renters; this combined with rental price growth is increasing household expenditure on rents. Utilities expenditure has increased, with households spending more on electricity, gas and water and sewerage charges. Although, households spend more per week on meals out and take away food than on their utilities.

Mr Hockman added: “While Food and non-alcoholic beverages remain a large component of household expenditure, the proportion spent on food and non-alcoholic beverages has fallen compared to 2011. This is partially due to retail competition putting downward pressure on the prices of food and non-alcoholic beverages.”

In dollar terms, the largest increase in household expenditure was in service related industries. Expenditure on child care (127.1 per cent), international holiday travel and accommodation (59.9 per cent) and education (55.8 per cent) have all seen significant increases.

Further information is available in Introduction of the 17th Series Australian Consumer Price Index, 2017 (cat. No. 6470.0.55.001) available from the ABS website: http://www.abs.gov.au.

Unfortunately, the CPI will continue to under-weight housing. As noted in April by CBA senior economist, Gareth Aird:

House price cycles are not captured in the CPI because the cost of land is excluded from the consumer basket…

According to the ABS, land prices are excluded from the CPI because they don’tt fit the definition of a consumption good. The ABS states that:

CPI only includes goods and services that are purchased by households for consumption. A consumption good or service is one from which households directly derive utility or satisfaction. Any business – related purchases by households are excluded from the basket, as are those items that have a significant savings or investment component, such as land and capital goods.

Here one could reasonably argue that purchasing a home to live in has aspects of both investment and consumption as utility and satisfaction are derived from home ownership.

We continue: the ABS also states that, “the principal purpose of the CPI has been to measure inflation faced by households to support the operation of macroeconomic policy decision making”.

Our emphasis is on “inflation faced by households” because clearly based on the exclusion of land prices in the CPI the ABS does not consider dwelling price rises to be “inflation faced by households”. That is true for households who own a home. But for aspiring home owners dwelling prices are part of the inflation that they face. Their exclusion from the CPI therefore makes it an inaccurate measure of the type of living costs that they face.

The RBA supports the exclusion of land prices in the CPI and according to the central bank, “the purchase of existing housing represents a transfer within the household sector (which means that there is zero net expenditure by the household sector in these transactions)”. Very true. But then rent is also effectively a transfer within the household sector from tenant to landlord and rent is included in the CPI…

The inclusion of dwelling prices in CPIH, even just accounting for 10% of the basket, pushes up the annual change significantly since 1998. The annual change in CPIH is, on average, 55bps higher than the annual change in CPI (chart 4).

The point of this exercise is to highlight how the exclusion of dwelling prices from the CPI has masked the uplift in the cost of living for households who don’t own a dwelling but aspire to purchase one. For them, the cost of living has risen by more than is implied by the CPI. This is, to an extent, very much a question of generational equity.

…younger people, who are less likely to own a dwelling, have faced a greater deterioration in real wages than is implied by deflating nominal wages by the CPI. This is because the single biggest purchase they are yet to make is not included in the CPI. And it has, of course, been rising much, much quicker than the CPI itself.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.