Via the ABS:
The Consumer Price Index (CPI) measures price change for goods and services purchased by Australian households in the eight capital cities. It is a measure of inflation that informs monetary and fiscal policy. It is also used widely by economists and the general community to assess the health of the Australian economy.
An area of interest is whether prices are increasing at the same rate for goods and services that could be considered essential (non-discretionary), compared to goods and services that are more discretionary in nature. To inform this, the ABS has classified CPI goods and services into two categories: ‘Non-discretionary’ and ‘Discretionary’.
Analysis indicates that prices of non-discretionary goods and services increased slightly faster than for discretionary goods and services. Over the period 2012 to 2019, cumulative non-discretionary inflation was 14.8 per cent, whereas discretionary inflation was 12.9 per cent. Excluding the impact of tobacco (which more than doubled in price over the period) resulted in lower discretionary inflation of 6.4 per cent.
Defining non-discretionary and discretionary
There are no international standards or definitions for non-discretionary and discretionary household spending. Deciding whether a good or service meets a basic need (non-discretionary) is somewhat subjective and will differ across households. In light of this, to categorise the 87 CPI components as either ‘non-discretionary’ or discretionary,’ the ABS has developed the following definitions:
Goods or services which are purchased because they meet a basic need (food, shelter, healthcare), are required to maintain current living arrangements (car maintenance, school fees), or are a legal obligation (compulsory insurance, stamp duty).
Spending on these goods or services may be less responsive when there are changes in household wealth and incomes, or changes in the relative prices of goods or services.
Goods or services which could be considered ‘optional’ purchases, such as take away meals, alcohol and holidays.
Spending on these goods and services may be more responsive to changes in household wealth or relative prices.
Goods and services were classified in line with the above definitions. Table 1 shows the allocation of the expenditure weight for each CPI group to the non-discretionary and discretionary categories. A list of each of the 87 CPI components classified as either non-discretionary or discretionary is provided in the appendix.
Table 1: Weight contribution by CPI group (a) CPI Non-discretionary Discretionary Weight % Weight % Weight % All groups 100 58.5 41.7 Food and non-alcoholic beverages 16.2 7.6 8.6 Alcohol and tobacco 8.0 0.0 8.0 Clothing and footwear 3.2 0.0 3.2 Housing 22.7 22.7 0.0 Furnishings, household equipment and services 8.9 3.8 5.1 Health 5.8 5.8 0.0 Transport 10.2 6.9 3.3 Communication 2.4 2.4 0.0 Recreation and culture 12.4 0.8 11.6 Education 4.4 2.8 1.6 Insurance and financial services 5.8 5.8 0.0
a. Weights represent the March 2020 quarter. Values may not sum due to rounding
Between 2011 and the start of 2020 non-discretionary inflation exceeded overall CPI inflation. Price increases in housing, health and education costs were the main contributors to non-discretionary inflation. Figure 2 shows a fall and subsequent rise in non-discretionary inflation in 2020. This was the result of free child care being introduced in the June quarter and removed in the September quarter, as well as volatility in automotive fuel prices.
Figure 2 also shows that from 2011 discretionary inflation rose more slowly than overall CPI inflation. Price falls for goods such as clothing, furniture, household appliances and motor vehicles were the main reason, while price increases for discretionary food has also been subdued in recent years.
Tobacco was the biggest contributor to discretionary inflation, with prices more than doubling since 2011 following annual increases in the tobacco excise. Removing tobacco reduces cumulative discretionary inflation since 2011-12 from 16 per cent to 8 per cent. With ABS data showing that fewer than 15 per cent of Australians are daily smokers, removing the impact of tobacco price increases from discretionary inflation makes it more representative of the majority of the population.
The rate of non-discretionary inflation has been more than double that of discretionary inflation (excluding tobacco) over the period analysed. This analysis shows how prices for goods and services which could be considered ‘essential’ were increasing more rapidly than those for more ‘optional’ goods and services. This provides valuable insights into how Australian households have experienced inflation in recent times.
The ABS is seeking feedback on the usefulness of these measures of discretionary and non-discretionary inflation and the potential to continue to produce them in the future.
Obviously, taxes should not be included in the CPI. That will lead to all kinds of unintended consequences such as distorted wage outcomes and monetary policy.
That said, we should be including property prices in the CPI. AS we, and Gareth Aird at CBA have argued previously using a house price-adjusted measure:
There is a massive flaw in using the CPI as a proxy for changes in the cost of living.
The index ignores price changes in the single biggest purchase a person (or household) is likely to make in their lifetime – a dwelling.
For households that do not own a dwelling and aspire to purchase one, the CPI is a very poor measure of changes in the cost of living.
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