Unit 1
Unit 2
Inflation
Measurement
Inflation is measured through changes in the consumer price index. This measure is assessed by the Australian Bureau of Statistics (ABS). To understand this process, it will be helpful to see the rate of inflation as it has been calculated in Australia in recent years.
As you can see, there has been some variation in the rate of inflation seen in Australia recently. In 2007/08 the rate peaked at 4.5%, largely due to strong demand for our commodities from overseas. To combat this, the Reserve Bank increased the cash rate to 7.25%, which is well above the average rate that has been seen in the last twenty years. While this had some impact on demand, the global financial crisis of (which started in 2007) ultimately helped to reduce demand side pressure in this country. Falling domestic confidence and a decline in economic activity amongst our trading partners helped to push the inflation rate down to 1.5%halfway through 2009.
In order to determine these figures, the ABS conducts a wide ranging survey. As you can imagine there are many millions of goods and services available for sale in Australia, and the price for each item is not consistent between states (or even between locations within the same state). This all acts to make the process very complicated! Although there are some limitations, the measure of inflation that is used in Australia is sophisticated.
Step 1: The Survey
The first step is to go out and collect prices. The ABS reports on the rate of inflation every three months, and so this is effectively a constant process. The collection of prices is complicated by the fact that some stores will be having a sale, certain items might be upgraded during the survey period, while others will be phased out.
Despite these issues, the people conducting the survey will actually visit thousands of stores in each of the capital cities in Australia. With limitations on time and cost it isn’t possible to include some major regional centres, such as Geelong or the Gold Coast. Over 80,000 items are included in the survey.
Step 2: Weighting
Does your family spend more money on bread, or books? What about rent, or the amount paid to finance a mortgage? Does petrol consume more of your family’s weekly income than school fees?
These questions are important. Imagine that an item is “cheap”, but is something that your family buys every day (like bread). If the price of bread increases, this will affect your spending power more than an increase in prices for items that you buy less frequently. If a loaf of bread increased in price by $1, this would be far more dramatic than an increase in the price of a new motorbike by $1,000; people spend more of the income they receive on bread than they do on motorbikes.
The ABS must try and account for these variations. They do this by “weighting” the prices that they collect. The price of bread has a much higher weighting than the price of a motorbike. While this process is far from perfect, it does mean that the final figure that we see for inflation is a much better reflection of the way in which price changes have actually affected us on average over the period being assessed.
Step 3: The Calculation
After going through the collection and weighting procedure, the ABS creates the consumer price index. An index is simply a relative measure; if the index increases from 100 to 104, then we can see that the CPI has “increased”. We can then use this information to calculate the rate of inflation.
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