Australia ABS Updated Expenditure Weights Seen Lowering CPI

     SYDNEY (MNI) -  - The Australian Bureau of Statistics Monday updated the

weights for expenditure classes used to compile the quarterly consumer price

index, which will be used from the fourth quarter data to be published in late

January 2018.

     The update is expected to lower the pace of headline and core inflation.

Prior to the release, Westpac senior economist Justin Smirk expected the new

weights could lower the headline inflation by up to 0.4 percentage point and

core inflation by 0.3 percentage point by end-2018. The new weights are "broadly

as expected," Smirk said at first glance following the release.

     The weightings update was the first in five years but in future ABS said it

will do the update every year.  

     The update was done as part of the 17th Series Australian Consumer Price

Index 2017 that also includes changes in methodology used to estimate

substitution bias. According to ABS, the new approach will result in the more

accurate estimate of true inflation, due to the original financial year weights

being used, and with the period of the indexes and weights now aligning.

     "Over time, the effective expenditure weights in the CPI become less

representative of actual household expenditure patterns," RBA Deputy Governor

Guy Debelle explained in a recent speech. "That is, they are putting more weight

on items whose prices are rising than households are actually spending on them.

This introduces a bias in the measured CPI - known as substitution bias - which

only is addressed when the expenditure weights are updated. Because households

tend to shift expenditure towards relatively cheaper items, infrequent updating

of weights tends to overstate measured CPI inflation."

     ABS said the amount of bias in the Australian CPI is on average 0.22 of a

percentage point per year between 1998-99 and 2015-16, due to the inability to

take account of the upper level item substitution effect. "This is lower than

previously estimated (+0.24 of a percentage point between June 2000 and June

2011), predominantly due to the low inflationary environment over recent years."

     According to ABS, the average annual substitution bias increases at a

faster rate the longer the period between re-weightings. The average annual bias

is 0.11 one year after a re-weight, increasing to 0.20 in the sixth year.

     The Reserve Bank of Australia had warned that the re-weighing would reduce

measured inflation but said it was difficult to estimate the size of the effect

because past re-weightings are not necessarily a good guide to future episodes.

     In his recent speech, Debelle said that "because of substitution bias,

history suggests that measured CPI inflation has been overstated by an average

of 0.25 percentage point in the period between expenditure share updates."

     "However, from a policy point of view, the inflation target is sufficiently

flexible to accommodate the bias, given its relatively small size," he said.

     Below are the new weights:

                                  17th Series  16th Series

----------------------------------------------------------

Food and non-alcoholic beverages        16.09        16.84

Alcohol and tobacco                      7.09         7.06

--Tobacco                                2.60         2.32

Clothing and footwear                    3.55         3.98

Housing                                 22.68        22.30

Furnishings, household equipment         9.39         9.10

Health                                   5.43         5.29

Transport                               10.32        11.55

Communication                            2.68         3.05

Recreation and culture                  12.71        12.56

Education                                4.27         3.18

Insurance and financial services         5.80         5.08

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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