Every three months, the Australian Bureau of Statistics (the ABS) reports on the data they have been continuously collecting. Surveyors go out into the eight capital cities and find the prices of approximately 80,000 goods and services. This “basket of goods and services” is officially called the regimen.
Once the price of each product has been established, it is important to gain an understanding of how a change in the price of that product will actually affect our purchasing power, and hence our standard of living. This is a very important concept to understand.
For example, most people will buy certain things every day. Food, petrol and train tickets will be purchased very frequently, and as such a change in the price of any of these items (even though they may be relatively inexpensive) can have an impact on our overall spending patterns. On the other hand, very few people are lucky enough to be able to travel overseas every week. In fact, an overseas trip may be a very rare occurrence. As such, a change in the price of international airfares will have a smaller impact on our spending patterns, even though the cost of the item is much higher than the cost of fuel or bread.
To reflect this, the ABS uses a statistical process known as weighting to try to more accurately reflect the way in which the changes which have been observed will actually affect our purchasing power. (You can find out the exact weightings used in Australia by clicking here however, you will not need to be able to recall the exact weights for the end of year exam.)
Let us take a very basic example. We will assume that there are only two products in the market. The observed prices for these products in two consecutive samples are as follows:
| Product | Survey 1 | Survey 2 |
| Bread | $4.20 | $4.50 |
| Haircuts | $18.00 | $17.50 |
Based on this we can see that the total amount spent in survey 1 would have been $22.20, while in survey 2 it would have been $22.00 – a lower amount. From this you might conclude that we have experienced deflation. However…. The reality is that a change in the price of bread will have a greater impact on us. Let us also imagine that we spend 80% of our money on bread, and only 20% on haircuts. We can now use these “weights” to look at the figures in a different way:
| Product | Survey 1 | Weighted Value (1) |
Survey 2 | Weighted Value (2) |
| Bread | $4.20 | $3.36 | $4.50 | $3.60 |
| Haircuts | $18.00 | $3.60 | $17.50 | $3.50 |
| Total | $6.96 | $7.10 |
From this we can see that when we look at the percentage of our income that is actually used for each item our purchasing power has decreased. We will now need to spend more money overall to continue purchasing the same number of haircuts and the same amount of bread.
From this, we can calculate the inflation rate:
| Survey 2 – Survey 1 | x 100 = Inflation rate |
| Survey 1 |
In the case of our imaginary economy above, we can use this formula to calculate the inflation rate as follows:
| $7.10 – $6.96 | x 100 = 2.0115% |
| $6.96 |
Even though our initial calculation showed that the total value of goods and services offered in this economy had fallen, we have actually experience inflation of just over 2% between survey 1 and survey 2.